Capturing Smile Dynamics with the Quintic Volatility Model: SPX, Skew-Stickiness Ratio and VIX

Eduardo Abi Jaber, Shaun and Li
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Eduardo Abi Jaber: Xiaoyuan
Shaun: Xiaoyuan

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Abstract: We introduce the two-factor Quintic Ornstein-Uhlenbeck model, where volatility is modeled as a polynomial of degree five based on the sum of two Ornstein-Uhlenbeck processes driven by the same Brownian Motion, each mean-reverting at a different speed. We demonstrate that the Quintic model effectively captures the volatility surfaces of SPX and VIX while aligning with the skew-stickiness ratio (SSR) across maturities ranging from a few days to over two years. Furthermore, the Quintic model shows consistency with key empirical stylized facts, notably reproducing the Zumbach effect.

Date: 2025-03
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