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On Estimation of Volatility Surface and Prediction of Future Spot Volatility

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  • Fima Klebaner
  • Truc Le
  • Robert Liptser

Abstract

A stochastic process v(t) is considered as a model for asset's spot volatility. A new approach is introduced for predicting future spot volatility and future volatility surface using a finite set of observed option prices. When the volatility parameter σ2 in the Black-Scholes formula[image omitted] is represented by the integrated volatility [image omitted] , then the local volatility surface can be estimated. The main idea is to linearize the expressions for implied volatility by using a result on Normal correlation. This linearization is obtained by introducing various ad hoc approximations.

Suggested Citation

  • Fima Klebaner & Truc Le & Robert Liptser, 2006. "On Estimation of Volatility Surface and Prediction of Future Spot Volatility," Applied Mathematical Finance, Taylor & Francis Journals, vol. 13(3), pages 245-263.
    • Handle: RePEc:taf:apmtfi:v:13:y:2006:i:3:p:245-263
    DOI: 10.1080/13504860600564661
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    References listed on IDEAS

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    Cited by:

    1. Jan Obloj, 2007. "Fine-tune your smile: Correction to Hagan et al," Papers 0708.0998, arXiv.org, revised Mar 2008.
    2. Sabiruzzaman, Md. & Monimul Huq, Md. & Beg, Rabiul Alam & Anwar, Sajid, 2010. "Modeling and forecasting trading volume index: GARCH versus TGARCH approach," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(2), pages 141-145, May.
    3. Vyacheslav Abramov & Fima Klebaner, 2007. "Estimation and Prediction of a Non-Constant Volatility," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 14(1), pages 1-23, March.

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