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VAR Modeling for Dynamic Semiparametric Factors of Volatility Strings

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Author Info
Ralf Brüggemann
Wolfgang Härdle
Julius Mungo
Carsten Trenkler

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Abstract

The implied volatility of a European option as a function of strike price and time to maturity forms a volatility surface. Traders price according to the dynamics of this high dimensional surface. Recent developments that employ semiparametric models approximate the implied volatility surface (IVS) in a finite dimensional function space, allowing for a low dimensional factor representation of these dynamics. This paper presents an investigation into the stochastic properties of the factor loading times series using the vector autoregressive (VAR) framework and analyzes associated movements of these factors with movements in some macroeconomic variables of the Euro - economy.

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Publisher Info
Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2006-011.

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Length: 29 pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2006-011

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Related research
Keywords: Implied volatility surface; dynamic semiparametric factor model; unit root tests; vector autoregression; impulse responses;

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Find related papers by JEL classification:
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)
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  19. Lydia Mechtenberg, 2006. "Cheap Talk in the Classroom," SFB 649 Discussion Papers SFB649DP2006-019, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany. [Downloadable!]
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