Implied Stochastic Volatility Models

Testing continuous-time models of the spot interest rate

Yacine Ait-Sahalia, Chenxu Li and Chen Xu Li

The Review of Financial Studies, 2021, vol. 34, issue 1, 394-450

Abstract: This paper proposes “implied stochastic volatility models” designed to fit option-implied volatility data and implements a new estimation method for such models. The method is based on explicitly linking observed shape characteristics of the implied volatility surface to the coefficient functions that define the stochastic volatility model. The method can be applied to estimate a fully flexible nonparametric model, or to estimate by the generalized method of moments any arbitrary parametric stochastic volatility model, affine or not. Empirical evidence based on S&P 500 index options data show that the method is stable and performs well out of sample.

JEL-codes: C51 C52 G12 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (10)

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