For short-term FX options, I find empirically that the degree of curvature of the smile (OTM/ATM in %) is higher in low volatility environments. Similar results are found by Pena et al. ("Why do we smile", 1999) for stock markets.

My question is: If we rule out jumps and non-normal returns, can this effect mathematically follow from stochastic volatility models - as long as we believe in mean reversion of volatility?

Maybe due to a correlation with spot and volatility?


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