Smiling jumps

Smiling jumps

Pure jump models for energy prices

Volatility skews have been the subject of much interest in the past couple of decades. Effort has been directed down three routes (Lipton, 2002a and 2002b): models with jumps (Lipton, 2002c); local volatility, where the volatility is a deterministic function of spot price and time (Dupire, 1994); and stochastic volatility, where the volatility is a separate variable but correlated to the spot price, and the state space becomes one dimension higher (Heston, 1993). The main emphasis has

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