VAR Modeling for Dynamic Loadings Driving Volatility Strings

Ralf Brüggemann, Wolfgang Härdle, Julius Mungo and Carsten Trenkler

Journal of Financial Econometrics, 2008, vol. 6, issue 3, 361-381

Abstract: The implied volatility of an option as a function of strike price and time to maturity forms a volatility surface. Traders price according to the dynamics of this high dimensional surface. Recent developments that employ semiparametric models approximate the implied volatility surface (IVS) in a finite dimensional function space, allowing for a low dimensional factor representation of these dynamics. This paper presents an investigation into the stochastic properties of the factor loading time series using the vector autoregressive (VAR) framework and analyzes the dynamic relationship of these factors with economic indicators. Copyright The Author 2008. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Date: 2008
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