Third-Order Short-Time Expansions for Close-to-the-Money Option Prices Under the CGMY Model

The short-time asymptotic behavior of option prices for a variety of models with jumps has received much attention in recent years. In the present work, novel third-order approximations for close-to-the-money European option prices under an infinite-variation CGMY Lévy model are derived, and are then extended to a model with an additional independent Brownian component. The asymptotic regime considered, in which the strike is made to converge to the spot stock price as the maturity approaches zero, is relevant in applications since the most liquid options have strikes that are close to the spot price. Our results shed new light on the connection between both the volatility of the continuous component and the jump parameters and the behavior of option prices near expiration when the strike is close to the spot price. In particular, a new type of transition phenomenon is uncovered in which the third order term exhibits two distinct asymptotic regimes depending on whether Y ∈ (1, 3/2) or Y ∈ (3/2, 2). AMS 2000 subject classifications: 60G51, 60F99, 91G20, 91G60.