Short-maturity skew stickiness ratio under local volatility

Source abstract

We prove that the skew stickiness ratio converges to two at short maturity under local volatility models. This appears to be the first rigorous proof of this limit for a general time-dependent local volatility function. As a by-product, we strengthen the one-half rule of the implied volatility skew by removing uniform ellipticity and global bounds on spatial derivatives of order at least two. The proof uses a first-order Watanabe expansion.