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Stochastic Models of Implied Volatility Surfaces (2002)
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BibTeX
@MISC{Cont02stochasticmodels,
author = {Rama Cont and José da Fonseca and F- Paris and La Defense and Valdo Durrleman},
title = {Stochastic Models of Implied Volatility Surfaces},
year = {2002}
}
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Abstract
We propose a market-based approach to the modeling of implied volatility, in which the implied volatility surface is directly used as the state variable to describe the joint evolution of market prices of options and their underlying asset. We model the evolution of an implied volatility surface by representing it as a randomly uctuating surface driven by a finite number of orthogonal random factors. Our approach is based on a Karhunen-Loeve decomposition of the daily variations of implied volatilities obtained from market data on S&P500 and DAX options.
