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Implied volatility string dynamics

A primary goal in modelling the dynamics of implied volatility surfaces (IVS) aims at reducing complexity. For this purpose one fits the IVS each day and applies a principal component analysis using a functional norm. This approach, however, neglects the degenerated string structure of the implied v...

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Bibliographic Details
Main Authors: Fengler, Matthias (Author) , Härdle, Wolfgang (Author) , Mammen, Enno (Author)
Corporate Author: Sonderforschungsbereich Quantifikation und Simulation Ökonomischer Prozesse (Other)
Format: Book/Monograph Working Paper
Language:English
Published: Berlin Humboldt-Universität 2003
Series:Discussion papers of interdisciplinary research project 373 2003,54
In: Discussion papers of interdisciplinary research project 373 (2003,54)

Subjects:
Arbeitspapier
Graue Literatur
Online Access:Resolving-System, Volltext: http://hdl.handle.net/10419/66280
Resolving-System, Volltext: http://nbn-resolving.de/urn:nbn:de:kobv:11-10050885
Verlag, Volltext: http://edoc.hu-berlin.de/series/sfb-373-papers/2003-54/PDF/54.pdf
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Author Notes:Matthias R. Fengler; Wolfgang Härdle; Enno Mammen
Description
Summary:A primary goal in modelling the dynamics of implied volatility surfaces (IVS) aims at reducing complexity. For this purpose one fits the IVS each day and applies a principal component analysis using a functional norm. This approach, however, neglects the degenerated string structure of the implied volatility data and may result in a severe modelling bias. We propose a dynamic semiparametric factor model, which approximates the IVS in a finite dimensional function space. The key feature is that we only fit in the local neighborhood of the design points. Our approach is a combination of methods from functional principal component analysis and backfitting techniques for additive models. The model is found to have an approximate 10% better performance than the typical naïve trader models. The model can be a backbone in risk management serving for value at risk computations and scenario analysis. -- Implied Volatility Surface ; Smile ; Generalized Additive Models ; Backfitting ; Functional Principal Component Analysis
Physical Description:Online Resource
Format:Systemvoraussetzungen: Acrobat reader.

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