Smile dynamics III

To remedy some of the limitations of popular models used for equity derivatives hightlighted in previous work (Bergomi, 2004), we proposed a stochastic volatility model based on a specification of the joint dynamics of the underlying spot and its implied forward variance swap (VS) variances (Bergomi, 2005). The aim of this model was to afford better control of:

- the term structure of the volatility of volatility;

- the forward skew; and

- the correlation between spot and VS volatilities for the pricing of options such as reverse cliquets, accumulators and options on realised variance. In practice, as there were no traded instruments to hedge the volatility-of-volatility risk, the level of the corresponding parameter in our model was set to a conservative value and we concluded our article with the following statement: "It is the hope of the author that the liquidity of options on volatility and variance increases so that we will soon be able to trade the smile of the volatility of volatility!"

Smile dynamics III

 

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe

You are currently unable to copy this content. Please contact info@risk.net to find out more.

What gold's rise means for rates, equities

It has been several years since we have seen volatility in gold. An increase in gold volatility can typically be associated with a change in sentiment and investor behavior. The precious metal has surged this year on increased demand for safe haven…

You need to sign in to use this feature. If you don’t have a Risk.net account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here