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Implied volatility surfaces during the period of global financial crisis

Author

Listed:
  • Tony S. Wirjanto

    (Department of Statistics & Actuarial Science and School of Accounting & Finance, University of Waterloo, Waterloo, Ontario, Canada)

  • Anyi Zhu

    (#x2020;RBC Capital Markets, 200 Bay Street, Toronto, Ontario M5J 2J5, Canada)

Abstract

This paper adopts a parametric regression approach to model and calibrate implied volatility surface during the period of the global financial crisis. Due to its relatively low computational cost, it facilitates comparison across a great number of different competing models. The proposed regression models are backtested against historical S&P 500 prices during both volatile and non-volatile periods as proxied by the VIX index around the same time period, and the fits of the models are assessed. Furthermore both an equally weighted scheme and an alternative scheme based on observed implied volatilities as the weight are deployed and the results produced by these two schemes are contrasted and compared. Finally the concept of promptness, instead of the more traditional concept of time to maturity, is introduced as a covariate in the regression models to better capture the shape of the volatility surface during the period characterized by a prolonged low interest-rate environment.

Suggested Citation

  • Tony S. Wirjanto & Anyi Zhu, 2018. "Implied volatility surfaces during the period of global financial crisis," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 5(01), pages 1-50, March.
    • Handle: RePEc:wsi:ijfexx:v:05:y:2018:i:01:n:s2424786318500019
    DOI: 10.1142/S2424786318500019
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    References listed on IDEAS

    as
    1. Rama Cont & Jose da Fonseca, 2002. "Dynamics of implied volatility surfaces," Quantitative Finance, Taylor & Francis Journals, vol. 2(1), pages 45-60.
    2. Christoffersen, Peter & Jacobs, Kris, 2004. "The importance of the loss function in option valuation," Journal of Financial Economics, Elsevier, vol. 72(2), pages 291-318, May.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    Full references (including those not matched with items on IDEAS)

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