Hi guys,
I'm reading the quant manual from ORC (now part of ITIVITI) and learned the 'wing model' they use for fitting the volatility curve.
Volatility models specifics - SourceForge
https://www.google.com/url?sa=t&rct=j&q ... InuoA0I91gIt is quite simple math-wise - basically quadratic spline with smoothing and flattened parts on both sides (the 'wing' part?).
However, I'm a bit confused about the idea and how to use this model. Why do we want our skew to flatten out on the deep ITM/OTM parts? Does that mean we would get more reasonable results when extrapolating the skew?
In addition, when fitting the wing curve, do we manually set the dc,uc,dsm,usm parameters, i.e. do we fix the ranges before fitting, or rather these are also parts of the parameter set to be optimized? It seems that, with the ORC software, I can fix, set manually and fit whatever parameter I want. I don't have the ORC software on hand so can only infer the usage from the manual. It would be really helpful if anyone who use(d) ORC could shed some light on it.
Thx in advance!