On new approach of extracting option implied volatility surface

Shiu Fong Wong

Research output: Contribution to journalMeeting abstract

Abstract

Purpose: To propose a novel approach of extracting option implied volatility surface for assets with no liquid option markets. Originality: Option implied volatility surfaces have been widely used in asset pricing and risk management. They provide an important source of information, such as, at- the-money(ATM) volatilities and skewness, for pricing, hedging and managing risk of various financial products. In this project, we focus on extracting option implied volatility surfaces of assets which have with no liquid option markets from other benchmark assets, say market indices. Design/Methodology/approach: We establish the relationship between these assets and market indices through continuous-time Capital Asset Pricing Model (CAPM) with returns governed by Lévy processes. The parameters in the Lévy processes can be calibrated using the Fast Fourier Transformation (F.F.T.) of highly liquidated options on market indices. The option prices of the assets without an option market can be calculated through the beta coefficient. Findings: Empirical result shows this method can capture the nonlinearity behaviour of volatility surfaces and provide information about implied volatility smile and skewness. Research implications: We propose a rigorous parametric treatment in pricing and managing risk of financial products which depends on assets with no market observable implied volatility surfaces.
Original languageEnglish
Pages (from-to)105-106
Number of pages2
JournalExpo 2011 Higher Degree Research : book of abstracts
Publication statusPublished - 2011
EventHigher Degree Research Expo (7th : 2011) - Sydney
Duration: 10 Oct 201111 Oct 2011

Keywords

  • volatility surface
  • volatility smile
  • option valuation
  • CAPM
  • Lévy process

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