Smile dynamics
Traditionally, smile models have been assessed according to how well they fit market option prices across strikes and maturities. However, the pricing of most recent exotic structures, such as reverse cliquets or Napoleons, is more dependent on the assumptions made for the future dynamics of implied volatilities than on today’s vanilla option prices. Here, Lorenzo Bergomi studies examples of some popular classes of models, such as stochastic volatility and jump/Lévy models, to highlight some structural features of their dynamic properties
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