Short-time behavior of the At-The-Money implied volatility for the jump-diffusion stochastic volatility Bachelier model

Abstract

In this paper we use Malliavin Calculus techniques in order to obtain expressions for the short-time behavior of the at-the-money implied volatility (ATM-IV) level and skew for a jump-diffusion stock price. The diffusion part is assumed to be the stochastic volatility Bachelier model and the jumps are modeled by a pure-jump L\'evy process with drift so that the stock price is a martingale. Regarding the level, we show that the short-time behavior of the ATM-IV level is the same for all pure-jump L\'evy processes and, regarding the skew, we give conditions on the law of the jumps for the skew to exist. We also give several numerical examples of stochastic volatilities and L\'evy processes that confirm the theoretical results found in the paper.