We study a new class of three-factor affine option pricing models with interdependent volatility dynamics and a … stochastic skewness component unrelated to volatility shocks. These properties are useful in order (i) to model a term structure … of implied volatility skews more consistent with the data and (ii) to capture comovements of short and long term skews …

volatility model. The methodology is sufficiently flexible to be extended to time-dependent coefficients, multi …-dimensional stochastic volatility models, degenerate parabolic PDEs related to Asian options and also to include jumps …