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Modelling the implied volatility surface based on Shanghai 50ETF options

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  • Wang, Jinzhong
  • Chen, Shijiang
  • Tao, Qizhi
  • Zhang, Ting

Abstract

We develop a dynamic factor model to forecast the implied volatility surface (IVS) of Shanghai Stock Exchange 50ETF options. Based on the assumption that dynamic change in IVS is mean-reverting and Markovian, we use a state space model to capture the dynamics of IVS, and set the latent factors to be the Ornstein–Uhlenbeck processes. We obtain the optimal estimations of parameters using the Kalman filter algorithm. Empirical results show that our model performs better than the traditional IVS model in terms of fitting ability and prediction performance.

Suggested Citation

  • Wang, Jinzhong & Chen, Shijiang & Tao, Qizhi & Zhang, Ting, 2017. "Modelling the implied volatility surface based on Shanghai 50ETF options," Economic Modelling, Elsevier, vol. 64(C), pages 295-301.
    • Handle: RePEc:eee:ecmode:v:64:y:2017:i:c:p:295-301
    DOI: 10.1016/j.econmod.2017.04.009
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    References listed on IDEAS

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    Cited by:

    1. Yue, Tian & Gehricke, Sebastian A. & Zhang, Jin E. & Pan, Zheyao, 2021. "The implied volatility smirk in the Chinese equity options market," Pacific-Basin Finance Journal, Elsevier, vol. 69(C).

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    More about this item

    Keywords

    G13; C13; Dynamic factor model; Implied volatility surface; Kalman filter; Ornstein–Uhlenbeck process;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General

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