It is a well known from the empirical option pricing literature, that actual option prices show persistent and systematic deviations from theoretical values under standard pricing assumptions. While a substantial number of enhancements have been proposed, these approaches typically leave...

Empirical studies have shown that implied volatilities of long-term options react quite strongly to changes in implied volatilities of short-term options and do not display the rationally expected smoothing behavior. Given the observed strong mean-reversion in volatility, those findings have...