Moment Explosions in Stochastic Volatility Models

  title={Moment Explosions in Stochastic Volatility Models},
  author={Peter Friz and Martin Keller-Ressel},
Let (St)t≥0 be the discounted price process in a stochastic volatility model. A moment explosion takes place, if the moment E[S t ] of some given order u ∈ R becomes infinite (‘explodes’) after some finite time T∗(u). Moment explosions are closely related to the shape of the implied volatility surface, where they can be used to obtain approximations for deep in-the-money and out-of-the-money strikes. Furthermore moment explosions may lead to infinite prices of derivatives with super-linear… CONTINUE READING
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