LSE Working Paper
22 Pages Posted: 16 Apr 2001
Date Written: July 11, 2000
In this paper, we assume that log returns can be modelled by a Levy process. We give explicit formulae for option prices by means of the Fourier transform. We explain how to infer the characteristics of the Levy process from option prices.
This enables us to generate an implicit volatility surface implied by market data. This model is of particular interest since it extends the seminal Black Scholes  model consistently with volatility smile.
Keywords: Levy process, Fourier and Laplace transform, Smile
JEL Classification: G13
Suggested Citation: Suggested Citation