Download or read book How Important is the Term Structure in Implied Volatility Surface Modeling Evidence from Foreign Exchange Options written by George Chalamandaris and published by . This book was released on 2013 with total page 40 pages. Available in PDF, EPUB and Kindle. Book excerpt: We claim that previously proposed parametric specifications that linearly approximate the term structure of the implied volatility surface (IVS) in option prices fail to capture important information regarding the expectations of market participants. This paper proposes a parametric specification for describing the IVS that allows flexible modeling of the term structure through a Nelson and Siegel (1987) factorization, recently proposed by Diebold and Li (2006) in the context of yield curve modeling. The specification is tested on implied volatilities from the overndash;thendash;counter foreign exchange options market, where contracts with long expiries are actively traded and thus the term structure dimension of the surface should be very important. We first show that the proposed volatility specification can consistently and remarkably improve our ability to describe the surface on any given day. We then establish the economic relevance of the incremental information captured by our proposed specification by showing that it can produce more accurate forecasts of implied volatility that can support longndash;term profitable trading strategies in the absence of transaction costs.
Download or read book Expectations Hypothesis of the Term Structure of Implied Volatility written by Soku Byoun and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Using a stochastic volatility option pricing model, we show that the implied volatilities of at-the-money options are not necessarily unbiased and that the fixed interval time-series can produce misleading results. Our results do not support the expectations hypothesis: long-term volatilities rise relative to short-term volatilities, but the increases are not matched as predicted by the expectations hypothesis. In addition, an increase in the current long-term volatility relative to the current short-term volatility is followed by a subsequent decline. The results are similar for both foreign currency and the Samp;P 500 stock index options.
Download or read book The Volatility Surface written by Jim Gatheral and published by John Wiley & Sons. This book was released on 2011-03-10 with total page 204 pages. Available in PDF, EPUB and Kindle. Book excerpt: Praise for The Volatility Surface "I'm thrilled by the appearance of Jim Gatheral's new book The Volatility Surface. The literature on stochastic volatility is vast, but difficult to penetrate and use. Gatheral's book, by contrast, is accessible and practical. It successfully charts a middle ground between specific examples and general models--achieving remarkable clarity without giving up sophistication, depth, or breadth." --Robert V. Kohn, Professor of Mathematics and Chair, Mathematical Finance Committee, Courant Institute of Mathematical Sciences, New York University "Concise yet comprehensive, equally attentive to both theory and phenomena, this book provides an unsurpassed account of the peculiarities of the implied volatility surface, its consequences for pricing and hedging, and the theories that struggle to explain it." --Emanuel Derman, author of My Life as a Quant "Jim Gatheral is the wiliest practitioner in the business. This very fine book is an outgrowth of the lecture notes prepared for one of the most popular classes at NYU's esteemed Courant Institute. The topics covered are at the forefront of research in mathematical finance and the author's treatment of them is simply the best available in this form." --Peter Carr, PhD, head of Quantitative Financial Research, Bloomberg LP Director of the Masters Program in Mathematical Finance, New York University "Jim Gatheral is an acknowledged master of advanced modeling for derivatives. In The Volatility Surface he reveals the secrets of dealing with the most important but most elusive of financial quantities, volatility." --Paul Wilmott, author and mathematician "As a teacher in the field of mathematical finance, I welcome Jim Gatheral's book as a significant development. Written by a Wall Street practitioner with extensive market and teaching experience, The Volatility Surface gives students access to a level of knowledge on derivatives which was not previously available. I strongly recommend it." --Marco Avellaneda, Director, Division of Mathematical Finance Courant Institute, New York University "Jim Gatheral could not have written a better book." --Bruno Dupire, winner of the 2006 Wilmott Cutting Edge Research Award Quantitative Research, Bloomberg LP
Download or read book An E Arch Model for the Term Structure of Implied Volatility of FX Options written by Marco Avellaneda and published by . This book was released on 1997 with total page 25 pages. Available in PDF, EPUB and Kindle. Book excerpt: We construct a statistical model for term-structure of implied volatilities of currency options based on daily historical data for 13 currency pairs in a 19-month period. We examine the joint evolution of 1 month, 2 month, 3 month, 6 month and 1 year 50-delta options in all the currency pairs. We show that there exist three uncorrelated state variables (principal components) which account for the parallel movement, slope oscillation, and curvature of the term structure and which explain, on average, the movements of the term-structure of volatility to more than 95% in all cases. We test and construct an exponential ARCH, or E-ARCH, model for each state variable. One of the applications of this model is to produce confidence bands for the term- structure of volatility.
Download or read book Volatility Surface and Term Structure written by Kin Keung Lai and published by Routledge. This book was released on 2013-09-11 with total page 102 pages. Available in PDF, EPUB and Kindle. Book excerpt: This book provides different financial models based on options to predict underlying asset price and design the risk hedging strategies. Authors of the book have made theoretical innovation to these models to enable the models to be applicable to real market. The book also introduces risk management and hedging strategies based on different criterions. These strategies provide practical guide for real option trading. This book studies the classical stochastic volatility and deterministic volatility models. For the former, the classical Heston model is integrated with volatility term structure. The correlation of Heston model is considered to be variable. For the latter, the local volatility model is improved from experience of financial practice. The improved local volatility surface is then used for price forecasting. VaR and CVaR are employed as standard criterions for risk management. The options trading strategies are also designed combining different types of options and they have been proven to be profitable in real market. This book is a combination of theory and practice. Users will find the applications of these financial models in real market to be effective and efficient.
Download or read book Model free Implied Volatility and Its Information Content written by 陳雅芝 and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Option Volatility Pricing Advanced Trading Strategies and Techniques written by Sheldon Natenberg and published by McGraw Hill Professional. This book was released on 1994-08 with total page 485 pages. Available in PDF, EPUB and Kindle. Book excerpt: Provides a thorough discussion of volatility, the most important aspect of options trading. Shows how to identify mispriced options and to construct volatility and "delta neutral" spreads.
Download or read book Dynamics of Implied Volatility Surfaces written by Rama Cont and published by . This book was released on 2002 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: The prices of index options at a given date are usually represented via the corresponding implied volatility surface, presenting skew/smile features and term structure which several models have attempted to reproduce. However the implied volatility surface also changes dynamically over time in a way that is not taken into account by current modeling approaches, giving rise to quot;Vegaquot; risk in option portfolios. Using time series of option prices on the SP500 and FTSE indices, we study the deformation of this surface and show that it may be represented as a randomly fluctuating surface driven by a small number of orthogonal random factors. We identify and interpret the shape of each of these factors, study their dynamics and their correlation with the underlying index. Our approach is based on a Karhunen-Loeve decomposition of the daily variations of implied volatilities obtained from market data. A simple factor model compatible with the empirical observations is proposed. We illustrate how this approach model and improves the the well-known quot;sticky moneynessquot; rule used by option traders for updating implied volatilities. Our approach gives a justification for use of quot;Vegasquot; for measuring volatility risk and provides a decomposition of volatility risk as a sum of contributions from empirically identifiable factors.
Download or read book The Volatility Smile written by Emanuel Derman and published by John Wiley & Sons. This book was released on 2016-08-15 with total page 537 pages. Available in PDF, EPUB and Kindle. Book excerpt: The Volatility Smile The Black-Scholes-Merton option model was the greatest innovation of 20th century finance, and remains the most widely applied theory in all of finance. Despite this success, the model is fundamentally at odds with the observed behavior of option markets: a graph of implied volatilities against strike will typically display a curve or skew, which practitioners refer to as the smile, and which the model cannot explain. Option valuation is not a solved problem, and the past forty years have witnessed an abundance of new models that try to reconcile theory with markets. The Volatility Smile presents a unified treatment of the Black-Scholes-Merton model and the more advanced models that have replaced it. It is also a book about the principles of financial valuation and how to apply them. Celebrated author and quant Emanuel Derman and Michael B. Miller explain not just the mathematics but the ideas behind the models. By examining the foundations, the implementation, and the pros and cons of various models, and by carefully exploring their derivations and their assumptions, readers will learn not only how to handle the volatility smile but how to evaluate and build their own financial models. Topics covered include: The principles of valuation Static and dynamic replication The Black-Scholes-Merton model Hedging strategies Transaction costs The behavior of the volatility smile Implied distributions Local volatility models Stochastic volatility models Jump-diffusion models The first half of the book, Chapters 1 through 13, can serve as a standalone textbook for a course on option valuation and the Black-Scholes-Merton model, presenting the principles of financial modeling, several derivations of the model, and a detailed discussion of how it is used in practice. The second half focuses on the behavior of the volatility smile, and, in conjunction with the first half, can be used for as the basis for a more advanced course.
Download or read book Can the Dynamics of Implied Volatility Surfaces be Accurately Forecasted During a Period of Economic Crisis written by Daniel Schmid and published by . This book was released on 2013 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper finds that the dynamics of implied volatility can be forecasted to a certain extent during a period of crisis. The forecasts are achieved using a dimensionality reduction method known as principal component analysis. While the forecasts in terms of the amplitude of change do not outperform a random walk process, the direction of change can be predicted correctly in a statistically significant way with an average of 51.70% for all levels of time to maturity and moneyness. A trading model based on these forecasts is then presented and generates significant profits for low maturities, with an average daily return of 1.462% for options with a maturity of one week. The profits generated for options with a maturity of one year are no longer significant. This is explained by analysing the exposure to different risk parameters our portfolios bare. This paper concludes that accurately forecasting the dynamics of implied volatility might be sufficient in periods of great economic instability and underlines the need to develop accurate risk management tools to account for changes in the underlying price.
Download or read book Cross dynamics of Volatility Term Structure Implied by Foreign Exchange Options written by Elizaveta Krylova and published by . This book was released on 2005 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Term Structure Forecasts of Volatility and Option Portfolio Returns written by Jim Campasano and published by . This book was released on 2018 with total page 41 pages. Available in PDF, EPUB and Kindle. Book excerpt: I examine the predictability of equity implied volatility from the term structure, and find that forward volatility levels are biased predictors of future spot implied volatility. I construct options structures which proxy for forward volatility assets, and show that a long-short portfolio of forward volatility assets produce significantly profitable returns. As the construction of the trade is borne from a violation of an expectations hypothesis, the strategy is similar to the carry trade effected in foreign exchange and other assets. Unlike the returns to carry in foreign exchange and other assets, the forward volatility assets are not exposed to liquidity or volatility risks and negatively loads on market risk.
Download or read book The Implied Volatility Term Structure of Stock Index Options written by Scott Mixon and published by . This book was released on 2000 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper tests the expectations hypothesis of the term structure of implied volatility for several national stock market indices (Samp;P 500, FTSE 100, DAX, CAC, and Nikkei 225). The tests indicate that the slope of at-the-money implied volatility over different maturities has predictive ability for future short dated implied volatility, although not to the extent predicted by the expectations hypothesis. Equivalently, the forward implied volatility is a biased forecast of future implied volatility. The low forecast power may be due to a failure to control for a risk premium in the prices of options. Evidence is presented that a time varying risk premium that increases in volatility is consistent with the results. Including a volatility risk proxy in the specification improves the forecasting ability beyond that embedded in the implied volatility term structure.
Download or read book Predictability in Implied Volatility Surfaces written by George Chalamandaris and published by . This book was released on 2014 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent general equilibrium models prescribe predictable dynamics in the volatility surfaces that are implied by observed option prices. In this paper we investigate the predictability of surfaces, using extensive time series of implied volatilities from over-the-counter options on eight different currencies, quoted against the Euro. We examine implied volatility surfaces in the context of predictability through three different models, two that employ parametric specifications to describe the surface and one that decomposes it into latent statistical factors. All examined models are shown to [a] accurately describe the surfaces in-sample, and [b] produce forecasts that are superior to hard-to-beat benchmarks that ignore information about the shape of the surface, in medium to long-term horizons. We show that these forecasts can support profitable volatility trading strategies in the absence of transaction costs. Comparing across competing models, our results suggest that parametric models, that allow for a more structured description of the surface, are more successful in terms of forecasts' accuracy and significance of trading profits.
Download or read book Three Essays in Mathematical Finance written by Yingzi Zhu and published by . This book was released on 1997 with total page 188 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Modeling and Pricing of Swaps for Financial and Energy Markets with Stochastic Volatilities written by Anatoli? Vital?evich Svishchuk and published by World Scientific. This book was released on 2013 with total page 326 pages. Available in PDF, EPUB and Kindle. Book excerpt: Modeling and Pricing of Swaps for Financial and Energy Markets with Stochastic Volatilities is devoted to the modeling and pricing of various kinds of swaps, such as those for variance, volatility, covariance, correlation, for financial and energy markets with different stochastic volatilities, which include CIR process, regime-switching, delayed, mean-reverting, multi-factor, fractional, Levy-based, semi-Markov and COGARCH(1,1). One of the main methods used in this book is change of time method. The book outlines how the change of time method works for different kinds of models and problems arising in financial and energy markets and the associated problems in modeling and pricing of a variety of swaps. The book also contains a study of a new model, the delayed Heston model, which improves the volatility surface fitting as compared with the classical Heston model. The author calculates variance and volatility swaps for this model and provides hedging techniques. The book considers content on the pricing of variance and volatility swaps and option pricing formula for mean-reverting models in energy markets. Some topics such as forward and futures in energy markets priced by multi-factor Levy models and generalization of Black-76 formula with Markov-modulated volatility are part of the book as well, and it includes many numerical examples such as S&P60 Canada Index, S&P500 Index and AECO Natural Gas Index.
Download or read book Cross dynamics of Volatility Term Structure Implied by Foreign Exchange Options written by Elizaveta Krylova and published by . This book was released on 2005 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt:
