This study explores the impact of credit risk on the performance of UOB Bank of Singapore. The data for this study comes from the annual reports of the bank for five years. This study purpose is to analyse the impact of credit risk of UOB Bank of Singapore towards its financial performance. The investigation period is limited which from 2015 until 2019, the dependent variable of this study is credit risk, which is a measure of bank performance with internal and external factors. Regression analysis is used to test research hypotheses. In this study, descriptive analysis included such as credit risk (CR), internal factors, and macroeconomic environment was used to compare the performance of the bank for five years.
{"title":"Credit Risk and its Determinants: A Study on the Uob Bank in Singapore","authors":"THIVYA SHALINI S.SIVANANDAM","doi":"10.2139/ssrn.3935948","DOIUrl":"https://doi.org/10.2139/ssrn.3935948","url":null,"abstract":"This study explores the impact of credit risk on the performance of UOB Bank of Singapore. The data for this study comes from the annual reports of the bank for five years. This study purpose is to analyse the impact of credit risk of UOB Bank of Singapore towards its financial performance. The investigation period is limited which from 2015 until 2019, the dependent variable of this study is credit risk, which is a measure of bank performance with internal and external factors. Regression analysis is used to test research hypotheses. In this study, descriptive analysis included such as credit risk (CR), internal factors, and macroeconomic environment was used to compare the performance of the bank for five years.","PeriodicalId":272056,"journal":{"name":"CGN: Risk Management","volume":"83 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-10-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126180692","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A new parametric representation of implied volatility surfaces is proposed. The factors adequately capture the moneyness and maturity slopes, the smile attenuation, and the smirk. Furthermore, the implied volatility specification is twice continuously differentiable and well behaved asymptotically, allowing for clean interpolation and extrapolation over a wide range of moneyness and maturity. Fitting performance on S&P 500 options compares favourably with existing benchmarks. The benefits of a smoothed implied volatility surface are illustrated through the valuation of illiquid index derivatives, the extraction of the risk-neutral density and risk-neutral moments, the calculation of option price sensitivities, and the calculation of SVIX for the equity risk premium lower bound.
{"title":"Venturing into Uncharted Territory: An Extensible Parametric Implied Volatility Surface Model","authors":"Pascal François, Rémi Galarneau-Vincent, Geneviève Gauthier, Frédéric Godin","doi":"10.2139/ssrn.3888243","DOIUrl":"https://doi.org/10.2139/ssrn.3888243","url":null,"abstract":"A new parametric representation of implied volatility surfaces is proposed. The factors adequately capture the moneyness and maturity slopes, the smile attenuation, and the smirk. Furthermore, the implied volatility specification is twice continuously differentiable and well behaved asymptotically, allowing for clean interpolation and extrapolation over a wide range of moneyness and maturity. Fitting performance on S&P 500 options compares favourably with existing benchmarks. The benefits of a smoothed implied volatility surface are illustrated through the valuation of illiquid index derivatives, the extraction of the risk-neutral density and risk-neutral moments, the calculation of option price sensitivities, and the calculation of SVIX for the equity risk premium lower bound.","PeriodicalId":272056,"journal":{"name":"CGN: Risk Management","volume":"42 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2021-07-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124738156","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Drawing on data from a survey of 95 Australian Chief Audit Executives (CAEs) across a range of sectors, industries and size of organisations this report examines:
(i) the IAF’s involvement in assurance, consulting and management roles in ERM in Australia as well as expectations of how involvement in these roles might develop in future; and
(ii) perceptions of the current effectiveness of the IAF’s involvement in ERM. The findings indicate diversity of practices including evidence of IAFs engaging in ERM-related management-type roles potentially leading to impairment of their independence and objectivity.
Overall, effectiveness of IAFs’ ERM-related roles was generally perceived to be limited.
{"title":"Internal Audit's Involvement in Enterprise-Wide Risk Management","authors":"Sunnie Ba, Nonna Martinov-Bennie, Dominic Canestrari-Soh","doi":"10.2139/ssrn.3799024","DOIUrl":"https://doi.org/10.2139/ssrn.3799024","url":null,"abstract":"Drawing on data from a survey of 95 Australian Chief Audit Executives (CAEs) across a range of sectors, industries and size of organisations this report examines:<br><br>(i) the IAF’s involvement in assurance, consulting and management roles in ERM in Australia as well as expectations of how involvement in these roles might develop in future; and<br><br>(ii) perceptions of the current effectiveness of the IAF’s involvement in ERM.<br>The findings indicate diversity of practices including evidence of IAFs engaging in ERM-related management-type roles potentially leading to impairment of their independence and objectivity. <br><br>Overall, effectiveness of IAFs’ ERM-related roles was generally perceived to be limited.","PeriodicalId":272056,"journal":{"name":"CGN: Risk Management","volume":"25 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-12-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120967109","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
M. Onorato, Fabio Battaglia, Orazio Lascala, A. Ngjela
Valuation Risk (VR) is the risk that an entity will experience a loss due to the inaccurate determination of the fair value of the financial instruments on its balance sheet. This risk is particularly significant for financial instruments with complex features, with limited-to-no liquidity, or with valuations that rely on internally developed models that may be seldom verified using actual trades. Bank VR has been drawing international supervisory attention recently. In February, the European Systemic Risk Board warned that the substantial amounts of instruments with complex features and limited liquidity that sit on banks’ balance sheets are a source of risk for the global financial system. In parallel, the European Central Bank has put trading risk and asset valuations among its supervisory priorities for 2020 and said it plans to execute investigations on banks with significant portfolios of complex instruments measured at fair value based on pricing models. Measured in terms of possible losses from fair value calculations and/or estimation errors on capital ratios, the potential impact of VR can be significant for banks with a combination of a high ratio of fair valued assets to total assets and a high leverage ratio. In such cases, even a relatively small error in determining fair values may significantly decrease the Tier 1 ratio. From a business perspective, banks with opaque and incomplete disclosure about the methods used to estimate the fair value (and the variation thereof) of complex financial instruments may find their stock prices penalized by financial analysts. The nature of VR differs from other banking risks. Market and credit risks, for example, are defined in terms of potential losses derived from the uncertainty about instrument prices over time. VR, however, measures uncertainty surrounding the difference between the reported fair value and the “true” tradeable price that a bank could obtain if it were to sell an asset or transfer a liability at a specific point in time (i.e., the valuation date). Prudential and accounting frameworks have designated a set of mitigation measures to deal with VR uncertainty, which are interrelated. We have conducted a comprehensive analysis of bank VR, encompassing governance, regulatory, and prudential dimensions and summarize it in the paper linked below. We describe the VR framework for a bank through a holistic approach, provide a detailed analysis of the relationships between the accounting and the prudential frameworks, and outline a methodological approach for the prudential treatment of VR. We conclude that: 1) Regulators will increasingly challenge banks over their fair value determination practices as part of a supervisory approach that looks for consistency and rigor across the whole valuation process. In this context, banks will face governance challenges on the clarity of the roles and responsibilities for different functions (namely, finance and risk.) 2) The re
{"title":"Valuation Risk: A Holistic Accounting and Prudential Approach","authors":"M. Onorato, Fabio Battaglia, Orazio Lascala, A. Ngjela","doi":"10.2139/ssrn.3741563","DOIUrl":"https://doi.org/10.2139/ssrn.3741563","url":null,"abstract":"Valuation Risk (VR) is the risk that an entity will experience a loss due to the inaccurate determination of the fair value of the financial instruments on its balance sheet. This risk is particularly significant for financial instruments with complex features, with limited-to-no liquidity, or with valuations that rely on internally developed models that may be seldom verified using actual trades. \u0000 \u0000Bank VR has been drawing international supervisory attention recently. In February, the European Systemic Risk Board warned that the substantial amounts of instruments with complex features and limited liquidity that sit on banks’ balance sheets are a source of risk for the global financial system. In parallel, the European Central Bank has put trading risk and asset valuations among its supervisory priorities for 2020 and said it plans to execute investigations on banks with significant portfolios of complex instruments measured at fair value based on pricing models. \u0000 \u0000Measured in terms of possible losses from fair value calculations and/or estimation errors on capital ratios, the potential impact of VR can be significant for banks with a combination of a high ratio of fair valued assets to total assets and a high leverage ratio. In such cases, even a relatively small error in determining fair values may significantly decrease the Tier 1 ratio. From a business perspective, banks with opaque and incomplete disclosure about the methods used to estimate the fair value (and the variation thereof) of complex financial instruments may find their stock prices penalized by financial analysts. \u0000 \u0000The nature of VR differs from other banking risks. Market and credit risks, for example, are defined in terms of potential losses derived from the uncertainty about instrument prices over time. VR, however, measures uncertainty surrounding the difference between the reported fair value and the “true” tradeable price that a bank could obtain if it were to sell an asset or transfer a liability at a specific point in time (i.e., the valuation date). \u0000 \u0000Prudential and accounting frameworks have designated a set of mitigation measures to deal with VR uncertainty, which are interrelated. We have conducted a comprehensive analysis of bank VR, encompassing governance, regulatory, and prudential dimensions and summarize it in the paper linked below. We describe the VR framework for a bank through a holistic approach, provide a detailed analysis of the relationships between the accounting and the prudential frameworks, and outline a methodological approach for the prudential treatment of VR. We conclude that: \u0000 \u00001) Regulators will increasingly challenge banks over their fair value determination practices as part of a supervisory approach that looks for consistency and rigor across the whole valuation process. In this context, banks will face governance challenges on the clarity of the roles and responsibilities for different functions (namely, finance and risk.) \u0000 \u00002) The re","PeriodicalId":272056,"journal":{"name":"CGN: Risk Management","volume":"64 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-11-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132835058","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The purpose of this paper is to analyse and discuss the main differences between the Enterprise Risk Management systems of two of the most important retailers in the United States, namely Target Corporation and Walmart Inc. Firstly, the authors will briefly introduce the two companies, focusing on the different types of business strategies implemented and their history, considering then the main risk factors that characterize each company such as competitive and reputational, operational and investment, security and data privacy, supply chain and finally a short introduction about financial risks that will be the subject of deeper analysis afterwards. Likewise, the authors will evaluate the distinctive features of the financial structures and the strategic and tactical risk management processes of both companies, starting from the top level of the strategic planning to get to selected tools by the firms in order to face both financial and business risks that affect their activities. After that, it will be provided a deep analysis about the risk factors faced by Target and Walmart during their activities, with a main focus on financial risks that emerge from their financial structures, also considering derivative contracts to address the interest rate risk and the performance and cost of hedging interest rate risk. Moreover, the authors will underline differences and similarities among the two retailers in order to facilitate the comparison and the evaluation of the two ERM systems, but even further considerations highlighted in the paper.
{"title":"Enterprise Risk Management in Walmart and Target","authors":"Nico Asperti, Gabriele Vedovati, Luca Vuerich","doi":"10.2139/ssrn.3581698","DOIUrl":"https://doi.org/10.2139/ssrn.3581698","url":null,"abstract":"The purpose of this paper is to analyse and discuss the main differences between the Enterprise Risk Management systems of two of the most important retailers in the United States, namely Target Corporation and Walmart Inc. \u0000 \u0000Firstly, the authors will briefly introduce the two companies, focusing on the different types of business strategies implemented and their history, considering then the main risk factors that characterize each company such as competitive and reputational, operational and investment, security and data privacy, supply chain and finally a short introduction about financial risks that will be the subject of deeper analysis afterwards. \u0000 \u0000Likewise, the authors will evaluate the distinctive features of the financial structures and the strategic and tactical risk management processes of both companies, starting from the top level of the strategic planning to get to selected tools by the firms in order to face both financial and business risks that affect their activities. \u0000 \u0000After that, it will be provided a deep analysis about the risk factors faced by Target and Walmart during their activities, with a main focus on financial risks that emerge from their financial structures, also considering derivative contracts to address the interest rate risk and the performance and cost of hedging interest rate risk. \u0000 \u0000Moreover, the authors will underline differences and similarities among the two retailers in order to facilitate the comparison and the evaluation of the two ERM systems, but even further considerations highlighted in the paper.","PeriodicalId":272056,"journal":{"name":"CGN: Risk Management","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-04-25","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130364742","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
There have been significant environmental changes, including climate-related events that are affecting the businesses in India and the world. The impact of these events is estimated to cost the global economy by 20 percent of its GDP over the next few years with serious economic consequences for the business. In spite of such an alarming risk, very little is known on how corporates deal with sustainability in general and environmental sustainability in particular and their linkages to corporate risks in a strategy setting. This exploratory study attempts to understand the state of environmental sustainability risk disclosures of a select 200 companies listed in the National Stock Exchange of India (NSE). We use content analysis to study the disclosures made in the Annual Report, Business Responsibility Report, Sustainability Reports and other allied reports presented by the companies to understand the levels of disclosures. Further, we study the extent of disclosures by the companies to understand the present state of engagement with environment sustainability and climate change and their integration with the main stream risk management. Our findings suggest that almost all companies have some basic general disclosures on risks this can mainly be attributed to the mandatory nature of disclosures in the annual report. However, companies do not disclose more than 37% of the total risk categories identified by the research. Only financial risks are discussed in detail. Environment Sustainability risk disclosure is poor, and the quality of disclosure is also low. Disclosures on climate change risks were even more opaque. It appears that the changes in the weather patterns have either not emerged as a significant cause of concern to be disclosed in the risk section or they companies have generally not disclosed the same. We also find that environmental disclosures are not integrated in a more comprehensive in the risk reports. We also find that companies had not integrated sustainability risk into the risk management framework and strategy mainly due to lack of understanding of the direct business impacts (quantification), lack of regulations and stakeholder pressure. Moreover, firms have a short term outlook and are more focussed on quarterly results and profitability in the near term. Though reporting on environmental risks and climate change are weak, companies are taking initiatives on matters such as energy conservation, water, and waste management.
{"title":"Sustainability Risk Management: An Exploratory Study","authors":"P. Srinivasan, Prabeetha Bolar","doi":"10.2139/ssrn.3571257","DOIUrl":"https://doi.org/10.2139/ssrn.3571257","url":null,"abstract":"There have been significant environmental changes, including climate-related events that are affecting the businesses in India and the world. The impact of these events is estimated to cost the global economy by 20 percent of its GDP over the next few years with serious economic consequences for the business. In spite of such an alarming risk, very little is known on how corporates deal with sustainability in general and environmental sustainability in particular and their linkages to corporate risks in a strategy setting. \u0000 \u0000This exploratory study attempts to understand the state of environmental sustainability risk disclosures of a select 200 companies listed in the National Stock Exchange of India (NSE). We use content analysis to study the disclosures made in the Annual Report, Business Responsibility Report, Sustainability Reports and other allied reports presented by the companies to understand the levels of disclosures. Further, we study the extent of disclosures by the companies to understand the present state of engagement with environment sustainability and climate change and their integration with the main stream risk management. \u0000 \u0000Our findings suggest that almost all companies have some basic general disclosures on risks this can mainly be attributed to the mandatory nature of disclosures in the annual report. However, companies do not disclose more than 37% of the total risk categories identified by the research. Only financial risks are discussed in detail. Environment Sustainability risk disclosure is poor, and the quality of disclosure is also low. Disclosures on climate change risks were even more opaque. It appears that the changes in the weather patterns have either not emerged as a significant cause of concern to be disclosed in the risk section or they companies have generally not disclosed the same. We also find that environmental disclosures are not integrated in a more comprehensive in the risk reports. We also find that companies had not integrated sustainability risk into the risk management framework and strategy mainly due to lack of understanding of the direct business impacts (quantification), lack of regulations and stakeholder pressure. Moreover, firms have a short term outlook and are more focussed on quarterly results and profitability in the near term. Though reporting on environmental risks and climate change are weak, companies are taking initiatives on matters such as energy conservation, water, and waste management.","PeriodicalId":272056,"journal":{"name":"CGN: Risk Management","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-03-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"131257635","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Colin Turfus considers the Hull-White short rate model and extends the known closed-form pricing kernel to include the integrated short rate as a separate independent variable, applying it to cap/floor pricing.
Colin Turfus考虑了Hull-White短期利率模型，并扩展了已知的封闭式定价内核，将综合短期利率作为一个独立的自变量包括在内，并将其应用于上限/下限定价。
{"title":"Caplet Pricing with Backward-Looking Rates","authors":"C. Turfus","doi":"10.2139/ssrn.3527091","DOIUrl":"https://doi.org/10.2139/ssrn.3527091","url":null,"abstract":"Colin Turfus considers the Hull-White short rate model and extends the known closed-form pricing kernel to include the integrated short rate as a separate independent variable, applying it to cap/floor pricing.","PeriodicalId":272056,"journal":{"name":"CGN: Risk Management","volume":"77 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2020-01-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134254513","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Alain-Philippe Fortin, Jean-Guy Simonato, G. Dionne
Is univariate or multivariate modelling more effective when forecasting the market risk of stock portfolios? We examine this question in the context of forecasting the one-week-ahead Expected Shortfall of a portfolio invested in the Fama-French and momentum factors. Applying extensive tests and comparisons, we find that in most cases there are no statistically significant differences between the forecasting accuracy of the two approaches. This result suggests that univariate models, which are more parsimonious and simpler to implement than multivariate models, can be used to forecast the downsize risk of equity portfolios without losses in precision.
{"title":"Forecasting Expected Shortfall: Should We Use a Multivariate Model for Stock Market Factors?","authors":"Alain-Philippe Fortin, Jean-Guy Simonato, G. Dionne","doi":"10.2139/ssrn.3203049","DOIUrl":"https://doi.org/10.2139/ssrn.3203049","url":null,"abstract":"Is univariate or multivariate modelling more effective when forecasting the market risk of stock portfolios? We examine this question in the context of forecasting the one-week-ahead Expected Shortfall of a portfolio invested in the Fama-French and momentum factors. Applying extensive tests and comparisons, we find that in most cases there are no statistically significant differences between the forecasting accuracy of the two approaches. This result suggests that univariate models, which are more parsimonious and simpler to implement than multivariate models, can be used to forecast the downsize risk of equity portfolios without losses in precision.","PeriodicalId":272056,"journal":{"name":"CGN: Risk Management","volume":"63 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-12-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128156842","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Warrant is normally priced on the basis of Black and Scholes' model, which refers to calculations in a risk neutral world. Hence, it neither captures the market expectation nor being a good reference for the risk management process. This study examines a new way of pricing warrants under the real world probability by utilizing the recovered Vacisek short rate model. Applying Carr and Yu's recovery model, an extended version of Ross Recovery Theorem, we managed to recover the Vasisek process. Then, suppose that the economy is driven by this recovered Vacisek process, we point out a valuation model for the warrant of an underlying stock. We deduce that by applying the recovered Vacisek model we can derive the warrant price under the real world probability without the assumption of the market price of risk as in the risk neutral model.
{"title":"Call Option Pricing Model and Recovery Theorem: A Specific Case of Pricing Warrants","authors":"Huy Hoang Vu, Katsushi Nakajima","doi":"10.2139/ssrn.3482223","DOIUrl":"https://doi.org/10.2139/ssrn.3482223","url":null,"abstract":"Warrant is normally priced on the basis of Black and Scholes' model, which refers to calculations in a risk neutral world. Hence, it neither captures the market expectation nor being a good reference for the risk management process. This study examines a new way of pricing warrants under the real world probability by utilizing the recovered Vacisek short rate model. Applying Carr and Yu's recovery model, an extended version of Ross Recovery Theorem, we managed to recover the Vasisek process. Then, suppose that the economy is driven by this recovered Vacisek process, we point out a valuation model for the warrant of an underlying stock. We deduce that by applying the recovered Vacisek model we can derive the warrant price under the real world probability without the assumption of the market price of risk as in the risk neutral model.","PeriodicalId":272056,"journal":{"name":"CGN: Risk Management","volume":"164 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-12","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115393513","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In this paper, we provide an alternative framework for constructing an arbitrage-free European-style option surface. The main motivation for our work is that such a construction has rarely been achieved in the literature so far. The novelty of our approach is that we perform the calibration and interpolation in the put option space. To demonstrate the applicability of our technique, we extract the model-free implied volatility from S&P 500 index options. Subsequently, we compare its information content to that of the CBOE VIX index. Our empirical tests indicate that information content of the option-implied volatility values based on our method are superior to the VIX index.
{"title":"A Novel Method for Arbitrage-Free Option Surface Construction","authors":"Greg Orosi","doi":"10.2139/ssrn.3412123","DOIUrl":"https://doi.org/10.2139/ssrn.3412123","url":null,"abstract":"In this paper, we provide an alternative framework for constructing an arbitrage-free European-style option surface. The main motivation for our work is that such a construction has rarely been achieved in the literature so far. The novelty of our approach is that we perform the calibration and interpolation in the put option space. To demonstrate the applicability of our technique, we extract the model-free implied volatility from S&P 500 index options. Subsequently, we compare its information content to that of the CBOE VIX index. Our empirical tests indicate that information content of the option-implied volatility values based on our method are superior to the VIX index.","PeriodicalId":272056,"journal":{"name":"CGN: Risk Management","volume":"50 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-06-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117318496","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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