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VAR Modeling for Dynamic Loadings Driving Volatility Strings

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  • Ralf Brüggemann
  • Wolfgang Härdle
  • Julius Mungo
  • Carsten Trenkler

Abstract

The implied volatility of an 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 time series using the vector autoregressive (VAR) framework and analyzes the dynamic relationship of these factors with economic indicators. Copyright The Author 2008. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Suggested Citation

  • Ralf Brüggemann & Wolfgang Härdle & Julius Mungo & Carsten Trenkler, 2008. "VAR Modeling for Dynamic Loadings Driving Volatility Strings," Journal of Financial Econometrics, Oxford University Press, vol. 6(3), pages 361-381, Summer.
    • Handle: RePEc:oup:jfinec:v:6:y:2008:i:3:p:361-381
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbn004
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    Cited by:

    1. Eduardo Roca & Victor S.H. Wong & Gurudeo Anand Tularam, 2010. "Are socially responsible investment markets worldwide integrated?," Accounting Research Journal, Emerald Group Publishing Limited, vol. 23(3), pages 281-301, November.
    2. Brüggemann, Ralf & Jentsch, Carsten & Trenkler, Carsten, 2016. "Inference in VARs with conditional heteroskedasticity of unknown form," Journal of Econometrics, Elsevier, vol. 191(1), pages 69-85.
    3. Enzo Giacomini & Wolfgang Härdle & Volker Krätschmer, 2009. "Dynamic semiparametric factor models in risk neutral density estimation," AStA Advances in Statistical Analysis, Springer;German Statistical Society, vol. 93(4), pages 387-402, December.
    4. Eduardo Roca & Gurudeo Anand Tularam, 2012. "Which way does water flow? An econometric analysis of the global price integration of water stocks," Applied Economics, Taylor & Francis Journals, vol. 44(23), pages 2935-2944, August.
    5. Likai Chen & Weining Wang & Wei Biao Wu, 2017. "Dynamic Semiparametric Factor Model with a Common Break," SFB 649 Discussion Papers SFB649DP2017-026, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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