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Modelling the implied volatility surface:

an empirical study for FTSE options 

Amadeo Alentorn

Center of Computational Finance and Economic Agents (CCFEA)

University of Essex

May 2004

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Abstract

The volatility surface implied by option prices presents a structure that changes over time. The aim of this study is to present a framework to model the implied volatility of the FTSE options in real time, and to present a prototype application that implements this framework. We adapt the parametric models presented in Dumas et al (1998) to estimate the surfaces across moneyness instead of across strikes. We discuss how this framework can be used in applications of option pricing and risk management.

Applications

(not yet available)

The Models

Model 0:         

Model 1:         

Model 2:         

 

The Results

 

 

Figure 1: Estimated implied volatility surface for Model 0 on 19th April 2004.

 

 

Figure 2: Estimated implied volatility surface for Model 1 on 19th April 2004.

 

 

 

Figure 3: Estimated implied volatility surface for Model 2 on 19th April 2004.

 

Page last modified on 04/05/2004