A semiparametric factor model for implied volatility surface dynamics
Journal
Journal of Financial Econometrics
ISSN
1479-8409
ISSN-Digital
1479-8417
Type
journal article
Date Issued
2007-01-01
Author(s)
Abstract
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.
Language
English
Keywords
functional principal component Analysis
implied volatility surface
semiparametric factor models
HSG Classification
contribution to scientific community
Refereed
Yes
Publisher
Univ. Press
Publisher place
Oxford
Volume
5
Number
2
Start page
189
End page
218
Pages
30
Subject(s)
Eprints ID
86935