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Forecasting Parameters in the SABR Model

Author

Listed:
  • Li Chen

    (Lingnan College, Sun Yat-Sen University, Guangzhou, China)

  • Jianing Zhu

    (Paul Merage School of Business, University of California, Irvine, USA)

  • Cunyi Yang

    (Lingnan College, Sun Yat-Sen University, Guangzhou, China)

Abstract

We present two approaches to forecasting parameters in the SABR model. The first approach is the vector autoregressive moving-average model (VARMA) for the time series of the in-sample calibrated parameters, and the second is based on machine learning techniques called epsilon-support vector regression (ε-SVR). Using daily data of S&P 500 ETF option prices from January 1, 2014, to December 31, 2018, we first calibrate the daily values of the model parameters from the training sample, then conduct out-of-sample forecasting of parameters and pricing of options. Both approaches produce good fits between the forecasted and calibrated parameters for out-of-sample dates. A comparison study shows that using forecasted parameters as inputs, the SABR model generates better pricing results than assuming constant parameters or using lag parameters. We also discuss the market conditions under which one approach outperforms the other.

Suggested Citation

  • Li Chen & Jianing Zhu & Cunyi Yang, 2022. "Forecasting Parameters in the SABR Model," Journal of Economic Analysis, Anser Press, vol. 1(1), pages 66-78, September.
    • Handle: RePEc:bba:j00001:v:1:y:2022:i:1:p:66-78:d:13
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    References listed on IDEAS

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    1. Nawdha Thakoor & Désiré Yannick Tangman & Muddun Bhuruth, 2019. "A Spectral Approach to Pricing of Arbitrage-Free SABR Discrete Barrier Options," Computational Economics, Springer;Society for Computational Economics, vol. 54(3), pages 1085-1111, October.
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    Cited by:

    1. Jun Mao & Jiahao Xie & Zunguo Hu & Lijie Deng & Haitao Wu & Yu Hao, 2023. "Sustainable development through green innovation and resource allocation in cities: Evidence from machine learning," Sustainable Development, John Wiley & Sons, Ltd., vol. 31(4), pages 2386-2401, August.

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