Forecasting Implied Volatility Surfaces
We propose a new semi-parametric model for the implied volatility surface, which incorporates machine learning algorithms. Given a starting model, a tree-boosting algorithm sequentially minimizes the residuals of observed and estimated implied volatility. To overcome the poor predicting power of existing models, we include a grid in the region of interest, and implement a cross-validation strategy to find an optimal stopping value for the tree boosting. Back testing the out-of-sample appropriateness of our model on a large data set of implied volatilities on S&P 500 options, we provide empirical evidence of its strong predictive potential, as well as comparing it to other standard approaches in the literature.
|Date of creation:||Nov 2007|
|Contact details of provider:|| Postal: Dufourstrasse 50, CH - 9000 St.Gallen|
Phone: +41 71 224 23 25
Fax: +41 71 224 31 35
Web page: http://www.seps.unisg.ch/
More information through EDIRC
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.:
- Rama Cont & Jose da Fonseca, 2002. "Dynamics of implied volatility surfaces," Quantitative Finance, Taylor & Francis Journals, vol. 2(1), pages 45-60.
- Matthias R. Fengler & Wolfgang K. Härdle & Enno Mammen, 0. "A semiparametric factor model for implied volatility surface dynamics," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 5(2), pages 189-218.
- Sílvia Gonçalves & Massimo Guidolin, 2006.
"Predictable Dynamics in the S&P 500 Index Options Implied Volatility Surface,"
The Journal of Business,
University of Chicago Press, vol. 79(3), pages 1591-1636, May.
- Silvia Goncalves & Massimo Guidolin, 2005. "Predictable dynamics in the S&P 500 index options implied volatility surface," Working Papers 2005-010, Federal Reserve Bank of St. Louis.
- Heston, Steven L & Nandi, Saikat, 2000. "A Closed-Form GARCH Option Valuation Model," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 585-625.
- Granger,Clive W. J., 1999. "Empirical Modeling in Economics," Cambridge Books, Cambridge University Press, number 9780521662086, October.
- Granger,Clive W. J., 1999. "Empirical Modeling in Economics," Cambridge Books, Cambridge University Press, number 9780521778251, October.
- Nicolas P. B. Bollen & Robert E. Whaley, 2004. "Does Net Buying Pressure Affect the Shape of Implied Volatility Functions?," Journal of Finance, American Finance Association, vol. 59(2), pages 711-753, 04.
- Francesco Audrino, 2005. "The Stability of Factor Models of Interest Rates," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 3(3), pages 422-441.
- Hentschel, Ludger, 2003. "Errors in Implied Volatility Estimation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(04), pages 779-810, December.
- 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. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:usg:dp2007:2007-42. 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: (Joerg Baumberger)
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.