How does the volatility of volatility depend on volatility?

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Standard

How does the volatility of volatility depend on volatility? / Rømer, Sigurd Emil; Poulsen, Rolf.

I: Risks, Bind 8, Nr. 2, 59, 2020, s. 1-18.

Publikation: Bidrag til tidsskrift › Tidsskriftartikel › Forskning › fagfællebedømt

Harvard

Rømer, SE & Poulsen, R 2020, 'How does the volatility of volatility depend on volatility?', Risks, bind 8, nr. 2, 59, s. 1-18. https://doi.org/10.3390/risks8020059

APA

Rømer, S. E., & Poulsen, R. (2020). How does the volatility of volatility depend on volatility? Risks, 8(2), 1-18. [59]. https://doi.org/10.3390/risks8020059

Vancouver

Rømer SE, Poulsen R. How does the volatility of volatility depend on volatility? Risks. 2020;8(2):1-18. 59. https://doi.org/10.3390/risks8020059

Author

Rømer, Sigurd Emil ; Poulsen, Rolf. / How does the volatility of volatility depend on volatility?. I: Risks. 2020 ; Bind 8, Nr. 2. s. 1-18.

Bibtex

@article{f04748a2062f4ace9ada1e136decf271,
title = "How does the volatility of volatility depend on volatility?",
abstract = "We investigate the state dependence of the variance of the instantaneous variance of the S&P 500 index empirically. Time-series analysis of realized variance over a 20-year period shows strong evidence of an elasticity of variance of the variance parameter close to that of a log-normal model, albeit with an empirical autocorrelation function that one-factor diffusion models fail to capture at horizons above a few weeks. When studying option market behavior (in-sample pricing as well as out-of-sample pricing and hedging over the period 2004–2019), messages are mixed, but systematic, model-wise. The log-normal but drift-free SABR (stochastic-alpha-beta-rho) model performs best for short-term options (times-to-expiry of three months and below), the Heston model—in which variance is stationary but not log-normal—is superior for long-term options, and a mixture of the two models does not lead to improvements.",
keywords = "Elasticity of variance of variance, Heston, SABR, Stochastic volatility",
author = "R{\o}mer, {Sigurd Emil} and Rolf Poulsen",
year = "2020",
doi = "10.3390/risks8020059",
language = "English",
volume = "8",
pages = "1--18",
journal = "Risks",
issn = "2227-9091",
publisher = "MDPI",
number = "2",

}

RIS

TY - JOUR

T1 - How does the volatility of volatility depend on volatility?

AU - Rømer, Sigurd Emil

AU - Poulsen, Rolf

PY - 2020

Y1 - 2020

N2 - We investigate the state dependence of the variance of the instantaneous variance of the S&P 500 index empirically. Time-series analysis of realized variance over a 20-year period shows strong evidence of an elasticity of variance of the variance parameter close to that of a log-normal model, albeit with an empirical autocorrelation function that one-factor diffusion models fail to capture at horizons above a few weeks. When studying option market behavior (in-sample pricing as well as out-of-sample pricing and hedging over the period 2004–2019), messages are mixed, but systematic, model-wise. The log-normal but drift-free SABR (stochastic-alpha-beta-rho) model performs best for short-term options (times-to-expiry of three months and below), the Heston model—in which variance is stationary but not log-normal—is superior for long-term options, and a mixture of the two models does not lead to improvements.

AB - We investigate the state dependence of the variance of the instantaneous variance of the S&P 500 index empirically. Time-series analysis of realized variance over a 20-year period shows strong evidence of an elasticity of variance of the variance parameter close to that of a log-normal model, albeit with an empirical autocorrelation function that one-factor diffusion models fail to capture at horizons above a few weeks. When studying option market behavior (in-sample pricing as well as out-of-sample pricing and hedging over the period 2004–2019), messages are mixed, but systematic, model-wise. The log-normal but drift-free SABR (stochastic-alpha-beta-rho) model performs best for short-term options (times-to-expiry of three months and below), the Heston model—in which variance is stationary but not log-normal—is superior for long-term options, and a mixture of the two models does not lead to improvements.

KW - Elasticity of variance of variance

KW - Heston

KW - SABR

KW - Stochastic volatility

UR - http://www.scopus.com/inward/record.url?scp=85086023658&partnerID=8YFLogxK

U2 - 10.3390/risks8020059

DO - 10.3390/risks8020059

M3 - Journal article

AN - SCOPUS:85086023658

VL - 8

SP - 1

EP - 18

JO - Risks

JF - Risks

SN - 2227-9091

IS - 2

M1 - 59

ER -

ID: 243061877