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DSFM fitting of implied volatility surfaces

Author

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  • Borak, Szymon
  • Fengler, Matthias R.
  • Härdle, Wolfgang Karl

Abstract

The implied volatility became one of the key issues in modern quantitative finance, since the plain vanilla option prices contain vital information for pricing and hedging of exotic and illiquid options. European plain vanilla options are nowadays widely traded, which results in a great amount of high-dimensional data especially on an intra day level. The data reveal a degenerated string structure. Dynamic Semiparametric Factor Models (DSFM) are tailored to handle complex, degenerated data and yield low dimensional representation of the implied volatility surface (IVS). We discuss estimation issues of the model and apply it to DAX option prices.

Suggested Citation

  • Borak, Szymon & Fengler, Matthias R. & Härdle, Wolfgang Karl, 2005. "DSFM fitting of implied volatility surfaces," SFB 649 Discussion Papers 2005-022, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    • Handle: RePEc:zbw:sfb649:sfb649dp2005-022
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    References listed on IDEAS

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    1. Rama Cont & Jose da Fonseca, 2002. "Dynamics of implied volatility surfaces," Quantitative Finance, Taylor & Francis Journals, vol. 2(1), pages 45-60.
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    3. Härdle, Wolfgang Karl & Mungo, Julius, 2007. "Long memory persistence in the factor of Implied volatility dynamics," SFB 649 Discussion Papers 2007-027, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    4. Brüggemann, Ralf & Härdle, Wolfgang Karl & Mungo, Julius & Trenkler, Carsten, 2006. "VAR modeling for dynamic semiparametric factors of volatility strings," SFB 649 Discussion Papers 2006-011, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.

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