Department of Economics and Business Economics

Dynamic Factor Models for the Volatility Surface

Research output: Working paperResearch

Standard

Dynamic Factor Models for the Volatility Surface. / van der Wel, Michel; Ozturk, Sait R.; Dijk, Dick van.

Aarhus : Institut for Økonomi, Aarhus Universitet, 2015.

Research output: Working paperResearch

Harvard

van der Wel, M, Ozturk, SR & Dijk, DV 2015 'Dynamic Factor Models for the Volatility Surface' Institut for Økonomi, Aarhus Universitet, Aarhus.

APA

van der Wel, M., Ozturk, S. R., & Dijk, D. V. (2015). Dynamic Factor Models for the Volatility Surface. Aarhus: Institut for Økonomi, Aarhus Universitet. CREATES Research Papers, No. 2015-13

CBE

van der Wel M, Ozturk SR, Dijk DV. 2015. Dynamic Factor Models for the Volatility Surface. Aarhus: Institut for Økonomi, Aarhus Universitet.

MLA

van der Wel, Michel, Sait R. Ozturk and Dick van Dijk Dynamic Factor Models for the Volatility Surface. Aarhus: Institut for Økonomi, Aarhus Universitet. (CREATES Research Papers; Journal number 2015-13). 2015., 44 p.

Vancouver

van der Wel M, Ozturk SR, Dijk DV. Dynamic Factor Models for the Volatility Surface. Aarhus: Institut for Økonomi, Aarhus Universitet. 2015 Mar 2.

Author

van der Wel, Michel ; Ozturk, Sait R. ; Dijk, Dick van. / Dynamic Factor Models for the Volatility Surface. Aarhus : Institut for Økonomi, Aarhus Universitet, 2015. (CREATES Research Papers; No. 2015-13).

Bibtex

@techreport{0c462a82af7049a6b0a4c8d4c0663751,
title = "Dynamic Factor Models for the Volatility Surface",
abstract = "The implied volatility surface is the collection of volatilities implied by option contracts for different strike prices and time-to-maturity. We study factor models to capture the dynamics of this three-dimensional implied volatility surface. Three model types are considered to examine desirable features for representing the surface and its dynamics: a general dynamic factor model, restricted factor models designed to capture the key features of the surface along the moneyness and maturity dimensions, and in-between spline-based methods. Key findings are that: (i) the restricted and spline-based models are both rejected against the general dynamic factor model, (ii) the factors driving the surface are highly persistent, (iii) for the restricted models option Delta is preferred over the more often used strike relative to spot price as measure for moneyness.",
keywords = "Dynamic Factor Models, Implied Volatility Surface, Kalman filter, Max-imum likelihood",
author = "{van der Wel}, Michel and Ozturk, {Sait R.} and Dijk, {Dick van}",
year = "2015",
month = "3",
day = "2",
language = "English",
series = "CREATES Research Papers",
publisher = "Institut for {\O}konomi, Aarhus Universitet",
number = "2015-13",
type = "WorkingPaper",
institution = "Institut for {\O}konomi, Aarhus Universitet",

}

RIS

TY - UNPB

T1 - Dynamic Factor Models for the Volatility Surface

AU - van der Wel, Michel

AU - Ozturk, Sait R.

AU - Dijk, Dick van

PY - 2015/3/2

Y1 - 2015/3/2

N2 - The implied volatility surface is the collection of volatilities implied by option contracts for different strike prices and time-to-maturity. We study factor models to capture the dynamics of this three-dimensional implied volatility surface. Three model types are considered to examine desirable features for representing the surface and its dynamics: a general dynamic factor model, restricted factor models designed to capture the key features of the surface along the moneyness and maturity dimensions, and in-between spline-based methods. Key findings are that: (i) the restricted and spline-based models are both rejected against the general dynamic factor model, (ii) the factors driving the surface are highly persistent, (iii) for the restricted models option Delta is preferred over the more often used strike relative to spot price as measure for moneyness.

AB - The implied volatility surface is the collection of volatilities implied by option contracts for different strike prices and time-to-maturity. We study factor models to capture the dynamics of this three-dimensional implied volatility surface. Three model types are considered to examine desirable features for representing the surface and its dynamics: a general dynamic factor model, restricted factor models designed to capture the key features of the surface along the moneyness and maturity dimensions, and in-between spline-based methods. Key findings are that: (i) the restricted and spline-based models are both rejected against the general dynamic factor model, (ii) the factors driving the surface are highly persistent, (iii) for the restricted models option Delta is preferred over the more often used strike relative to spot price as measure for moneyness.

KW - Dynamic Factor Models, Implied Volatility Surface, Kalman filter, Max-imum likelihood

M3 - Working paper

T3 - CREATES Research Papers

BT - Dynamic Factor Models for the Volatility Surface

PB - Institut for Økonomi, Aarhus Universitet

CY - Aarhus

ER -