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VAR Modeling for Dynamic Semiparametric Factors of Volatility Strings

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

The implied volatility of a European 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 times series using the vector autoregressive (VAR) framework and analyzes associated movements of these factors with movements in some macroeconomic variables of the Euro - economy.

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File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2006-011.pdf
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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2006-011.

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Length: 29 pages
Date of creation: Feb 2006
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2006-011
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  1. Toda, Hiro Y. & Yamamoto, Taku, 1995. "Statistical inference in vector autoregressions with possibly integrated processes," Journal of Econometrics, Elsevier, vol. 66(1-2), pages 225-250.
  2. Kenneth D. West & Whitney K. Newey, 1995. "Automatic Lag Selection in Covariance Matrix Estimation," NBER Technical Working Papers 0144, National Bureau of Economic Research, Inc.
  3. Matthias Fengler & Wolfgang Härdle & Christophe Villa, 2003. "The Dynamics of Implied Volatilities: A Common Principal Components Approach," Review of Derivatives Research, Springer, vol. 6(3), pages 179-202, October.
  4. Szymon Borak & Matthias Fengler & Wolfgang Härdle, 2005. "DSFM fitting of Implied Volatility Surfaces," SFB 649 Discussion Papers SFB649DP2005-022, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  5. Pesaran, M. H. & Shin, Y., 1997. "Generalised Impulse Response Analysis in Linear Multivariate Models," Cambridge Working Papers in Economics 9710, Faculty of Economics, University of Cambridge.
  6. Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers 0130, National Bureau of Economic Research, Inc.
  7. Matthias Fengler & Wolfgang Härdle & Enno Mammen, 2005. "A Dynamic Semiparametric Factor Model for Implied Volatility String Dynamics," SFB 649 Discussion Papers SFB649DP2005-020, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  8. Rama Cont & Jose da Fonseca, 2002. "Dynamics of implied volatility surfaces," Quantitative Finance, Taylor & Francis Journals, vol. 2(1), pages 45-60.
  9. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  10. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
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