Related papers: Skew and implied leverage effect: smile dynamics r…
We develop a dynamic version of the SSVI parameterisation for the total implied variance, ensuring that European vanilla option prices are martingales, hence preventing the occurrence of arbitrage, both static and dynamic. Insisting on the…
We argue that negative skew and positive mean of the distribution of stock returns are largely due to the broken symmetry of stochastic volatility governing gains and losses. Starting with stochastic differential equations for stock returns…
It is known that the implied volatility skew of FX options demonstrates a stochastic behavior which is called stochastic skew. In this paper we create stochastic skew by assuming the spot/instantaneous variance correlation to be stochastic.…
The Sharpe ratio, which is defined as the ratio of the excess expected return of an investment to its standard deviation, has been widely cited in the financial literature by researchers and practitioners. However, very little attention has…
We propose a new volatility model based on two stylized facts of the volatility in the stock market: clustering and leverage effect. We calibrate our model parameters, in the leading order, with 77 years Dow Jones Industrial Average data.…
This paper demonstrates the efficiency of using Edgeworth and Gram-Charlier expansions in the calibration of the Libor Market Model with Stochastic Volatility and Displaced Diffusion (DD-SV-LMM). Our approach brings together two research…
In some options markets (e.g. commodities), options are listed with only a single maturity for each underlying. In others, (e.g. equities, currencies), options are listed with multiple maturities. In this paper, we provide an algorithm for…
Excessive leverage, i.e. the abuse of debt financing, is considered one of the primary factors in the default of financial institutions. Systemic risk results from correlations between individual default probabilities that cannot be…
We address the statistical and optimization impacts of the classical sketch and Hessian sketch used to approximately solve the Matrix Ridge Regression (MRR) problem. Prior research has quantified the effects of classical sketch on the…
We consider the empirical eigenvalue distribution of random real symmetric matrices with stochastically independent skew-diagonals and study its limit if the matrix size tends to infinity. We allow correlations between entries on the same…
We explore a link between stochastic volatility (SV) and path-dependent volatility (PDV) models. Using assumed density filtering, we map a given SV model into a corresponding PDV representation. The resulting specification is lightweight,…
The paper demonstrates that a pure-diffusion 3/2 model is able to capture the observed upward-sloping implied volatility skew in VIX options. This observation contradicts a common perception in the literature that jumps are required for the…
The leverage effect-- the correlation between an asset's return and its volatility-- has played a key role in forecasting and understanding volatility and risk. While it is a long standing consensus that leverage effects exist and improve…
In modern portfolio theory, the balancing of expected returns on investments against uncertainties in those returns is aided by the use of utility functions. The Kelly criterion offers another approach, rooted in information theory, that…
Generating realistic synthetic option prices requires implied volatility as an input, yet implied volatility is itself derived from observed option prices, creating a circular dependency that limits synthetic data for machine-learning and…
In [1], we calibrated a one-factor Cheyette SLV model with a local volatility that is linear in the benchmark forward rate and an uncorrelated CIR stochastic variance to 3M caplets of various maturities. While caplet smiles for many…
Skewness and kurtosis are fundamental statistical moments commonly used to quantify asymmetry and tail behavior in probability distributions. Despite their widespread application in statistical mechanics, condensed matter physics, and…
We present a dynamic hedging scheme for S&P 500 options, where rebalancing decisions are enhanced by integrating information about the implied volatility surface dynamics. The optimal hedging strategy is obtained through a deep policy…
Cross-sectional dispersion in firm-level realized skewness is significantly and negatively related to future stock market returns. The predictive power of skewness dispersion is robust to in-sample and out-of-sample estimation and is…
Harvey et al. (2010) extended the Bayesian estimation method by Sahu et al. (2003) to a multivariate skew-elliptical distribution with a general skewness matrix, and applied it to Bayesian portfolio optimization with higher moments.…