The Dynamics of Implied Volatilities: A Common Principal Components Approach
It is common practice to identify the number and sources of shocks that move, e.g., ATM implied volatilities by principal components analysis. This approach, however, is likely to result in a loss of information, since the surface structure of implied volatilities is neglected. In this paper we analyze the implied volatility surface along maturity slices with a common principal components analysis (CPC), known from morphometrics. In CPC analysis, the space spanned by the eigenvectors is identical across groups, whereas variances associated with the common principal components vary. Our analysis shows that implied volatility surface dynamics can be traced back to a common eigenstructure in maturity slices. This empirical result is used to set up a factor model for implied volatility surface dynamics. Copyright Kluwer Academic Publishers 2003
Volume (Year): 6 (2003)
Issue (Month): 3 (October)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/new+%26+forthcoming+titles+%28default%29/journal/11147/PS2|
References listed on IDEAS
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.:
- Fengler, Matthias R. & Härdle, Wolfgang & Mammen, Enno, 2003. "Implied volatility string dynamics," SFB 373 Discussion Papers 2003,54, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- Rama Cont & Jose da Fonseca, 2002. "Dynamics of implied volatility surfaces," Quantitative Finance, Taylor & Francis Journals, vol. 2(1), pages 45-60.
- Farshid Jamshidian & Yu Zhu, 1996. "Scenario Simulation: Theory and methodology (*)," Finance and Stochastics, Springer, vol. 1(1), pages 43-67.
- Bernard Dumas & Jeff Fleming & Robert E. Whaley, 1998. "Implied Volatility Functions: Empirical Tests," Journal of Finance, American Finance Association, vol. 53(6), pages 2059-2106, December.
- Fengler, Matthias R. & Wang, Qihua, 2003. "Fitting the Smile Revisited: A Least Squares Kernel Estimator for the Implied Volatility Surface," SFB 373 Discussion Papers 2003,25, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
When requesting a correction, please mention this item's handle: RePEc:kap:revdev:v:6:y:2003:i:3:p:179-202. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Rebekah McClure)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.