Modeling the Implied Volatility Smirk in China: Do Non‐Affine Two‐Factor Stochastic Volatility Models Work?

Yifan Ye, Zheqi Fan and Xinfeng Ruan

Journal of Futures Markets, 2025, vol. 45, issue 6, 612-636

Abstract: In this paper, we investigate alternative one‐factor and two‐factor continuous‐time models with both affine and non‐affine variance dynamics for the Chinese options market. Through extensive empirical analysis of the option panel fit and diagnostics, we find that it is necessary to include both the non‐affine feature and the multi‐factor structure. For performance evaluation, we examine various measures from both aggregate and dynamic perspectives. Our results are statistically significant.

Date: 2025
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https://doi.org/10.1002/fut.22579

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