A Hull and White Formula for a General Stochastic Volatility Jump-Diffusion Model with Applications to the Study of the Short-Time Behavior of the Implied Volatility

Abstract

In this paper, generalizing results in Alos, Leon and Vives (2007b), we see that the dependence of jumps in the volatility under a jump-diffusion stochastic volatility model, has no effect on the short-time behaviour of the at-the-money implied volatility skew, although the corresponding Hull and White formula depends on the jumps. Towards this end, we use Malliavin calculus techniques for Levy processes based on Lokka (2004), Petrou (2006), and Sole, Utzet and Vives (2007).