Quantcast
Channel: MoneyScience: MoneyScience's news channel - arXiv > Recent Papers in Quant Finance
Viewing all articles
Browse latest Browse all 2696

Moment generating functions and Normalized implied volatilities: unification and extension via Fukasawa's pricing formula. (arXiv:1703.00957v1 [q-fin.PR])

$
0
0

We extend the model-free formula of [Fukasawa 2012] for $\mathbb E[\Psi(X_T)]$, where $X_T=\log S_T/F$ is the log-price of an asset, to functions $\Psi$ of exponential growth. The resulting integral representation is written in terms of normalized implied volatilities. Just as Fukasawa's work provides rigourous ground for Chriss and Morokoff's (1999) model-free formula for the log-contract (related to the Variance swap implied variance), we prove an expression for the moment generating function $\mathbb E[e^{p X_T}]$ on its analyticity domain, that encompasses (and extends) Matytsin's formula [Matytsin 2000] for the characteristic function $\mathbb E[e^{i \eta X_T}]$ and Bergomi's formula [Bergomi 2016] for $\mathbb E[e^{p X_T}]$, $p \in [0,1]$. Besides, we (i) show that put-call duality transforms the first normalized implied volatility into the second, and (ii) analyze the invertibility of the extended transformation $d(p,\cdot) = p \, d_1 + (1-p)d_2$ when $p$ lies outside $[0,1]$. As an application of (i), one can generate representations for the MGF (or other payoffs) by switching between one normalized implied volatility and the other.


Viewing all articles
Browse latest Browse all 2696

Trending Articles