SEMI-PARAMETRIC VOLATILITY SURFACE ESTIMATION

Date created
2015-04
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Abstract
In this paper, we have investigated the performance of a semi-parametric model of volatility surfaces by applying it to the prices of exchange-traded options on crude oil futures in a highly volatile environment. We have also reviewed the performance of a parametric and a nonparametric model in such market conditions. To confirm our findings, we have provided some performance metrics as well as further analysis on the dynamics of the underlying futures. Basedon our work, we have shown that the above models do not perform well in highly volatile conditions.<p>The overall contribution of this paper is to determine whether local volatility models in general are applicable to options on crude oil futures in a highly volatile market or we should move towards stochastic volatility approaches.
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MSc in Finance Project-Simon Fraser University
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