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Bergomi
Posts: 10
Joined: January 31st, 2017, 10:36 am

Re: Volatility Trading And Predicting

Could someone kindly send me the paper ? That's a topic I am really interested in.

frolloos
Posts: 1416
Joined: September 27th, 2007, 5:29 pm
Location: Netherlands

Re: Volatility Trading And Predicting

The paper is interesting, maybe the author will pm you and send it.

The gist of it / the basics you can derive yourself though, starting with the observation that

$E^Q [dC] = rCdt = rC^{BS} dt$

Then express $dC$ in terms of Black-Scholes Greeks. Once you've done that you have an equation for implied volatility. If you then assume that the correlation between implied volatility and the stock/index is constant across strikes, and also that the dollar gamma, volga and vanna are constant across strikes you have basically a way to calibrate the smile using 4 pillar options (or 3 if you assume the drift of implied vol is zero). This is in essence the so-called GVV cost frameworkby Arslan et al on which the paper by Alexander Giryavets builds.

There are quite a few assumptions here and it has been shown that these assumptions actually can lead to arbitrage. That said, it is conceptually interesting and I believe still an active field of research.

alexandergir
Topic Author
Posts: 13
Joined: February 12th, 2013, 2:59 pm

Re: Volatility Trading And Predicting

I think I saw some arbitrage paper at some point, it was looking at the wrong model which does not even fit the market so i didn't bother to look any further. These days 3 costs model is a standard and benchmark, of course it is arbitrage free and you can make stochastic model out of it.

To do research that will lend you a job at an options fund/prop folks should look at the Costs of short term tails, and, separately, costs of jumps around events. This is state of the art right now. One can start here with an excellent work of my friend Lorenzo: http://docs.wixstatic.com/ugd/c4ff5c_e3ae2ba856a54af49cc957cc425ca4fa.pdf

bondnote
Posts: 1
Joined: July 10th, 2016, 1:40 pm
Contact:

Re: Volatility Trading And Predicting

@alexandergir, can you please email me the paper original paper that was on SSRN on klhzim78atgmail.com

ianpatrickreid
Posts: 1
Joined: July 16th, 2017, 5:30 pm

Re: Volatility Trading And Predicting

Could @alexandergir or someone please send me a copy of the paper?  I would greatly appreciate it!  ian.patrick.reid@gmail.com  Concept sounds intriguing and the consensus of all those that do have it and have posted on it is very positive.  Thanks so much!

RDiamond
Posts: 157
Joined: March 5th, 2010, 5:57 pm

Re: Volatility Trading And Predicting

This does remind decomposition by Sebastien Bossu of delta hedging into the sum of Gamma-weighted MtM payoffs (daily).

alexandergir
Topic Author
Posts: 13
Joined: February 12th, 2013, 2:59 pm

Re: Volatility Trading And Predicting

SuperDerivatives founder is catching up. Very mathematically convoluted version that is hard to generalize for higher order corrections/jumps and build the rest of the machinery upon, but correct intuition and interesting perspective.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3007314

"We show that the three quantities that determine the volatility smile include the “pivot” volatility for the expiration (which can be thought of as the At The Money (ATM) volatility), the expected variance of the pivot volatility from inception to the expiration, and the expected covariance of the pivot volatility and the underlying asset/rate from inception to the expiration. After testing against a wide selection of asset across all asset classes, we conclude that the options market considers all liquid financial assets as though they obey the same type of new probability density function generated by this model. Moreover, we see that different asset classes are governed by different regions of the parameter zone leading to the varying shape of volatility smiles across asset classes."

Enjoy!

jpmota92
Posts: 1
Joined: January 3rd, 2018, 10:39 am

Re: Volatility Trading And Predicting

Can anyone kindly send me the paper please? joao.alves.mota@tecnico.ulisboa.pt
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