We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
A GARCH Parameterization of the Volatility Surface.
- Authors
MAZZONI, THOMAS
- Abstract
A new method to parameterize the local volatility surface is introduced. It is based on the representation of local variance as conditional bridge expectation of terminal instantaneous variance. To compute this expectation, an asymmetric GARCH-process is used as a proxy for instantaneous variance. The resulting formula for local volatility is represented in terms of a perturbation series, where first-order corrections are already very small. The parameters can be easily calibrated by extracting implied volatility from local volatility, using Gatheral's most likely path formalism. The method is tested on a large collection of European-style DAX Index options and is shown to generate superior results compared with existing methods.
- Subjects
PARAMETERIZATION; DAX index; FORMAL sociology; STOCK price indexes; POSITIVE volume index
- Publication
Journal of Derivatives, 2015, Vol 23, Issue 1, p9
- ISSN
1074-1240
- Publication type
Article
- DOI
10.3905/jod.2015.23.1.009