VAR Modeling of Factor Loading Series from a Dynamic Semiparametric Model for Implied Volatility String Dynamics∗
نویسندگان
چکیده
The implied volatility of a European option as a function of strike price and time to maturity forms a volatility surface. Traders price according to the dynamics of this high dimensional surface. Recent developments that employ semiparametric models approximate the implied volatility surface (IVS) in a finite dimensional function space allowing for a low dimensional factor representation of these dynamics. In this paper we examine the stochastic properties of the corresponding factor loading times series, which can help to give an accurate assessment of market risk. For this purpose we model the factor loadings using the vector autoregressive (VAR) framework.
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The implied volatility of an option as a function of strike price and time to maturity forms a volatility surface. Traders price according to the dynamics of this high dimensional surface. Recent developments that employ semiparametric models approximate the implied volatility surface (IVS) in a finite dimensional function space, allowing for a low dimensional factor representation of these dyn...
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