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A semiparametric factor model for implied volatility surface dynamics

Matthias Fengler, Wolfgang K. Härdle & Enno Mammen

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versione breve We propose a semiparametric factor model, which approximates the implied volatility surface (IVS) in a finite dimensional function space. Unlike standard principal component approaches typically used to reduce complexity, our approach is tailored to the degenerated design of IVS data. In particular, we only fit in the local neighborhood of the design points by exploiting the expiry effect present in option data. Using DAX index option data, we estimate the nonparametric components and a low-dimensional time series of latent factors. The modeling approach is completed by studying vector autoregressive models fitted to the latent factors.
   
tipo Journal paper
   
parole chiave functional principal component Analysis, implied volatility surface, semiparametric factor models
   
lingua English
kind of paper journal article
data di apparenza 1-1-2007
giornale Journal of Financial Econometrics
Editore Oxford University Press
ISSN 1479-8409
DOI 10.1093/jjfinec/nbm005
edizione del giornale 5
numero del giornale 2
pagine 189-218
review double-blind review
   
citation Fengler, M., Härdle, W. K., & Mammen, E. (2007). A semiparametric factor model for implied volatility surface dynamics. Journal of Financial Econometrics, 5(2), 189-218, DOI:10.1093/jjfinec/nbm005.