A note on essential smoothness in the Heston model
Abstract
This note studies an issue relating to essential smoothness that can arise when the theory of large deviations is applied to a certain option pricing formula in the Heston model. The note identifies a gap, based on this issue, in the proof of Corollary 2.4 in FordeJacquier10 and describes how to circumvent it. This completes the proof of Corollary 2.4 in FordeJacquier10 and hence of the main result in FordeJacquier10, which describes the limiting behaviour of the implied volatility smile in the Heston model far from maturity.
Turn this paper into a lesson
ArcXiv compiles a structured reading guide from this paper's metadata: plain-English importance, contributions, prerequisite concepts, which sections to read first, flashcards, and a quiz. Grounded in the abstract, never invented.