Smile Dynamics III

12 Pages Posted: 24 Oct 2009

Date Written: March 1, 2008

Abstract

In two previous articles, we assessed the structural limitations of existing models for equity derivatives and introduced a new model based on the direct modelling of the joint dynamics of the spot and the implied variance swap volatilities. Here we present new work on an extension of this model which, while remaining Markovian, provides control on the smile of forward variances and can be calibrated to VIX futures and options.

JEL Classification: G13

Suggested Citation

Bergomi, Lorenzo, Smile Dynamics III (March 1, 2008). Available at SSRN: https://ssrn.com/abstract=1493308 or http://dx.doi.org/10.2139/ssrn.1493308

Lorenzo Bergomi (Contact Author)

Societe Generale ( email )

Paris-La Défense, Paris 92987
France

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