QuoteThe starting point that would be independent on a quality of theory is to check their dependence. Compute correlation coefficient try write regression equations linear or nonlinear. If you will find out you can look for theoretical background. It is possible that you will find some kind of dependence between Index volatility and volatility ( or mean ) of vanilla equity stock options. I would say that numeric interpretation volatility in modern finance looks has a strong shift from what is well known from statistics. The formulas that used in pricing volatility the volatility if the linear deterministic functions are not 0. The developers attempted to convince that this is a good approximation and introduced some numeric examples that confirm this point. On the other hand as usually happened is how to randomize known data. For example the benchmark that uses closed or open prices as the estimate for a day statistics is the one point and if you use say mid-point between high-low for mean and high -low for volatility exposure is completely different point of view. no offence dude but I found it really hard to understand your point.I think BLOBY's question relates to the replication of puts on variance through options and please feel free to correct me if I am wrong. As is well known, a contract that pays the difference between realised variance and some contracted amounted (the variance swap) can be replicated in the BSM world using a portfolio of calls and puts (see Derman's paper). I think what BLOBY might be referring to is that as we can replicate the swap, can we use soemthing akin to put call parity to replicate just the put on variance using idnex options ? I think it should be possible but I haven't tried to do it yet.thinking about it (hence the edit), I think Carr has published something on pricing options on variance - hence you can use that and replicate the delta of the variance swap using options ....
Last edited by daveangel
on May 6th, 2009, 10:00 pm, edited 1 time in total.
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