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Smile Dynamics II

Lorenzo Bergomi

Societe Generale

March 1, 2005

In a previous article we highlighted how traditional stochastic volatility and Jump/Lévy models impose structural constraints on how the short forward skew, the spot/vol correlation, and the term structure of the vol-of-vol are related. Here we propose a model that enables them to be controlled separately and also prices options on realized variance consistently. We present pricing examples for a reverse cliquet, a Napoleon, an accumulator and an option on variance.

Number of Pages in PDF File: 14

JEL Classification: G13

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Date posted: October 24, 2009  

Suggested Citation

Bergomi, Lorenzo, Smile Dynamics II (March 1, 2005). Available at SSRN: https://ssrn.com/abstract=1493302 or http://dx.doi.org/10.2139/ssrn.1493302

Contact Information

Lorenzo Bergomi (Contact Author)
Societe Generale ( email )
Paris-La Défense, Paris 92987
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