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Modeling the Implied Volatility Smirk in China: Do Non‐Affine Two‐Factor Stochastic Volatility Models Work?

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  • Yifan Ye
  • Zheqi Fan
  • Xinfeng Ruan

Abstract

In this paper, we investigate alternative one‐factor and two‐factor continuous‐time models with both affine and non‐affine variance dynamics for the Chinese options market. Through extensive empirical analysis of the option panel fit and diagnostics, we find that it is necessary to include both the non‐affine feature and the multi‐factor structure. For performance evaluation, we examine various measures from both aggregate and dynamic perspectives. Our results are statistically significant.

Suggested Citation

  • Yifan Ye & Zheqi Fan & Xinfeng Ruan, 2025. "Modeling the Implied Volatility Smirk in China: Do Non‐Affine Two‐Factor Stochastic Volatility Models Work?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 45(6), pages 612-636, June.
    • Handle: RePEc:wly:jfutmk:v:45:y:2025:i:6:p:612-636
    DOI: 10.1002/fut.22579
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