Ultra-short-term volatility surfaces
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arXiv
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| Auteurs principaux: | , , , |
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| Format: | Preprint |
| Publié: |
2026
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| _version_ | 1866917372960440320 |
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| author | Bandi, Federico M. Fusari, Nicola Gazzani, Guido Renò, Roberto |
| author_facet | Bandi, Federico M. Fusari, Nicola Gazzani, Guido Renò, Roberto |
| contents | Options with maturities below one week, hereafter "ultra-short-term" options, have seen a sharp increase in trading activity in recent years. Yet, these instruments are difficult to price jointly using classical pricing models due to the pronounced oscillations observed in the at-the-money implied-volatility term structure across ultra-short-term tenors. We propose Edgeworth++, a parsimonious jump-diffusion model featuring a nonparametric stochastic volatility component, which provides flexibility in capturing implied-volatility smiles for each tenor, combined with a deterministic shift extension, which allows the model to fit rich at-the-money implied-volatility shapes across tenors. We derive a local (in tenor) expansion of the process characteristic function suited to value ultra-short-term options. The expansion leads to fast and accurate option pricing in closed form via standard Fourier inversion. We discuss the benefits of the proposed approach relative to benchmarks. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2603_29430 |
| institution | arXiv |
| publishDate | 2026 |
| record_format | arxiv |
| spellingShingle | Ultra-short-term volatility surfaces Bandi, Federico M. Fusari, Nicola Gazzani, Guido Renò, Roberto Mathematical Finance Computational Finance Options with maturities below one week, hereafter "ultra-short-term" options, have seen a sharp increase in trading activity in recent years. Yet, these instruments are difficult to price jointly using classical pricing models due to the pronounced oscillations observed in the at-the-money implied-volatility term structure across ultra-short-term tenors. We propose Edgeworth++, a parsimonious jump-diffusion model featuring a nonparametric stochastic volatility component, which provides flexibility in capturing implied-volatility smiles for each tenor, combined with a deterministic shift extension, which allows the model to fit rich at-the-money implied-volatility shapes across tenors. We derive a local (in tenor) expansion of the process characteristic function suited to value ultra-short-term options. The expansion leads to fast and accurate option pricing in closed form via standard Fourier inversion. We discuss the benefits of the proposed approach relative to benchmarks. |
| title | Ultra-short-term volatility surfaces |
| topic | Mathematical Finance Computational Finance |
| url | https://arxiv.org/abs/2603.29430 |