2025/06/09 by Roberto Baviera, Baviera, Roberto, Michele Domenico Massaria +1 · 3 citations
Economics, Econometrics and Finance · #Complex Systems and Time Series Analysis #Stochastic processes and financial applications #Economic theories and models
paper · pdf · doi:10.48550/arxiv.2506.08067
We investigate the asymptotic behaviour of the implied volatility in the Bachelier setting, extending the large-strike results established for the Black-Scholes framework. Exploiting the theory of regular variation, we derive explicit expressions for the Bachelier implied volatility in the wings of the smile, directly linking them to the tail decay of the underlying returns' distribution. Furthermore, we establish a rigorous connection between the analyticity strip of the characteristic function and the asymptotic slope of the volatility smile. Moreover, we show that if the implied variance grows linearly for large absolute moneyness degree, the underlying returns' distribution must exhibit exponential tail decay, and the corresponding characteristic function is analytic in a horizontal strip of the complex plane. These findings characterizes valid models based solely on the observable asymptotic behaviour of the smile.