Journal of Risk Model Validation

Risk.net

Validation of profit and loss attribution models for equity derivatives

Dilip B. Madan and King Wang

This paper includes:

  • Parametric synthesis of volatility surfaces.
  • Decompose attribution into surface slide, shift, cross effects and residuals.
  • Ten Factor attribution via level, theta, delta, gamma, four vega factors, volga and vanna.

In this paper, improvements made in profit and loss attribution models for derivatives by treating traditional sensitivities as regression factors are validated. Options surfaces are parametrically summarized permitting a decomposition of their movements into a number of distinct effects.

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