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Contribution Details
| Type | Master's Thesis |
| Scope | Discipline-based scholarship |
| Title | Calibration of the Implied Volatility Surface using High-Frequency Data |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 80 |
| Date | 2017 |
| Abstract Text | The accurate estimation of volatility is an extremely important task in quantitative fi- nance, being it an unknown but fundamental parameter in many financial models of derivatives. Implied volatility (IV) derived from option contracts has been long con- sidered representative of the market’s expectations of future realized volatility over the remaining life of the option. This thesis makes use of high-frequency option data in order to study this important quantity at the intraday level. Numerical and closed- form approximation methods for the solution of the implied volatility inverse problem are discussed, compared and implemented. Retrieving the implied volatility surface at higher frequencies is however a complex task, due to high data sample sizes, filtering is- sues, asynchronicity of the observations and frequent arbitrage opportunities in the data. Moreover, advanced derivatives models may require an arbitrage-free implied volatility surface as an input for correct calibration and price valuations. In order to derive the arbitrage-free implied volatility surface, we implement a set of filtering rules, interpo- lation and extrapolation procedures and spline smoothing of the price surface under no-arbitrage constraints. Using the value-second derivative representation of natural cu- bic splines, we implement and solve the problem numerically as a constrained quadratic optimization problem. Using the calibrated implied volatility surfaces to extract time series of high-frequency implied volatility, we show that day-of-the-week effects exist in implied volatility. In particular, close-to-close implied volatility increases on Mondays, rises slightly from Tuesday to Thursday and decreases drastically on Fridays. Further investigation shows that W-shaped patterns exist in intraday implied volatility, which can be linked to particular trading activity and liquidity patterns in option markets. By defining an intraday measure of implied volatility (IDIV), it is found that intraday implied volatility contains additional information about the future realized volatility compared to the normally used daily closing level of IV. In particular, computing intraday implied volatility from high-frequency option data allows to achieve better estimations of future volatility. |
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