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Parametric modeling of implied smile functions: a generalized SVI model

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  • Bo Zhao
  • Stewart Hodges

Abstract

In this paper, we propose a parametric model of implied variance which is a natural generalization of the SVI model. The model improves the SVI by allowing more flexibly the negative curvature in the tails which is justified both theoretically and empirically. The fitting of the model, comparing with the other competing parametric models (SVI, SABR), to the implied volatility smile and the risk neutral density function is tested on SPX options. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Bo Zhao & Stewart Hodges, 2013. "Parametric modeling of implied smile functions: a generalized SVI model," Review of Derivatives Research, Springer, vol. 16(1), pages 53-77, April.
    • Handle: RePEc:kap:revdev:v:16:y:2013:i:1:p:53-77
    DOI: 10.1007/s11147-012-9077-x
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    Cited by:

    1. Roza Galeeva & Ehud Ronn, 2022. "Oil futures volatility smiles in 2020: Why the bachelier smile is flatter," Review of Derivatives Research, Springer, vol. 25(2), pages 173-187, July.
    2. Harish S. Bhat & Nitesh Kumar, 2015. "Large-Scale Empirical Tests of the Markov Tree Model," IJFS, MDPI, vol. 3(3), pages 1-39, July.
    3. Maxim Ulrich & Simon Walther, 2020. "Option-implied information: What’s the vol surface got to do with it?," Review of Derivatives Research, Springer, vol. 23(3), pages 323-355, October.
    4. Claude Martini & Arianna Mingone, 2020. "No arbitrage SVI," Papers 2005.03340, arXiv.org, revised May 2021.
    5. Itkin, Andrey, 2015. "To sigmoid-based functional description of the volatility smile," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 264-291.
    6. Xu, Wei & Šević, Aleksandar & Šević, Željko, 2022. "Implied volatility surface construction for commodity futures options traded in China," Research in International Business and Finance, Elsevier, vol. 61(C).
    7. Hirbod Assa & Mostafa Pouralizadeh & Abdolrahim Badamchizadeh, 2019. "Sound Deposit Insurance Pricing Using a Machine Learning Approach," Risks, MDPI, vol. 7(2), pages 1-18, April.

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    More about this item

    Keywords

    Implied volatility; Parametric model; Kummer function; C02; C60; G13;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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