We compare the dynamic hedging performance of the deterministic local volatility function approach with the implied/constant volatility method. Using an example in which the underlying price follows an absolute diffusion process, we illustrate that hedge parameters computed from the implied/constant volatility method can have significant error even though the implied volatility method is able t...

Expected future volatility plays a central role in finance theory. Consequently, accurate estimation of this parameter is crucial to meaningful financial decision-making. Researchers generally on the past behavior of asset prices to estimate volatility, relating movements in volatility value with prior volatility and/or variables in the investors' information set. These procedures are by nature...

In this paper, we examine the small time-to-expiry behaviour of implied volatility in models of exponential Lévy type. In the at-the-money case, it turns out that the implied volatility converges, as time-to-expiry goes to zero, to the square root of the Gaussian member of the driving Lévy process’ characteristic triplet. In particular, the limit is zero if the Lévy process has no Gaussian part...

Forecasting volatility has received a great deal of research attention. Many articles have considered the relative performance of econometric model based and option implied volatility forecasts. While many studies have found that implied volatility is the preferred approach, a number of issues remain unresolved. One issue being the relative merit of combination forecasts. By utilising recent ec...