{"title":"Implied local volatility models","authors":"Chen Xu Li , Chenxu Li , Chun Li","doi":"10.1016/j.jempfin.2024.101567","DOIUrl":null,"url":null,"abstract":"<div><div>This paper proposes data-driven “implied local volatility models” that are designed to fit the observed level, slope, convexity, and term-structure slope of implied volatility surface at any maturity and strike. The method of construction hinges on the Taylor structure of implied volatility under generic local volatility models and the formula of Dupire (1994). An empirical application to the S&P 500 index options data validates the stable performance of our method in and out of sample and triggers several economic interpretations before, during, and in the aftermath of COVID-19 pandemic. The flexibility of our method is further consolidated by the case study on fitting (ultra) short-maturity implied volatilities and concave implied volatility curves.</div></div>","PeriodicalId":15704,"journal":{"name":"Journal of Empirical Finance","volume":"80 ","pages":"Article 101567"},"PeriodicalIF":2.1000,"publicationDate":"2024-11-19","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Journal of Empirical Finance","FirstCategoryId":"96","ListUrlMain":"https://www.sciencedirect.com/science/article/pii/S0927539824001014","RegionNum":2,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q2","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
引用次数: 0
Abstract
This paper proposes data-driven “implied local volatility models” that are designed to fit the observed level, slope, convexity, and term-structure slope of implied volatility surface at any maturity and strike. The method of construction hinges on the Taylor structure of implied volatility under generic local volatility models and the formula of Dupire (1994). An empirical application to the S&P 500 index options data validates the stable performance of our method in and out of sample and triggers several economic interpretations before, during, and in the aftermath of COVID-19 pandemic. The flexibility of our method is further consolidated by the case study on fitting (ultra) short-maturity implied volatilities and concave implied volatility curves.
期刊介绍：
The Journal of Empirical Finance is a financial economics journal whose aim is to publish high quality articles in empirical finance. Empirical finance is interpreted broadly to include any type of empirical work in financial economics, financial econometrics, and also theoretical work with clear empirical implications, even when there is no empirical analysis. The Journal welcomes articles in all fields of finance, such as asset pricing, corporate finance, financial econometrics, banking, international finance, microstructure, behavioural finance, etc. The Editorial Team is willing to take risks on innovative research, controversial papers, and unusual approaches. We are also particularly interested in work produced by young scholars. The composition of the editorial board reflects such goals.
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