TY - JOUR
AU - Villa, Christophe
AB - It is common practice to identify the number and sources of shocks that move, e.g., ATM implied volatilities by principal components analysis. This approach, however, is likely to result in a loss of information, since the surface structure of implied volatilities is neglected. In this paper we analyze the implied volatility surface along maturity slices with a common principal components analysis (CPC), known from morphometrics. In CPC analysis, the space spanned by the eigenvectors is identical across groups, whereas variances associated with the common principal components vary. Our analysis shows that implied volatility surface dynamics can be traced back to a common eigenstructure in maturity slices. This empirical result is used to set up a factor model for implied volatility surface dynamics.
TI - The Dynamics of Implied Volatilities: A Common Principal Components Approach
JF - Review of Derivatives Research
DO - 10.1023/B:REDR.0000004823.77464.2d
DA - 2004-10-04
UR - https://www.deepdyve.com/lp/springer-journals/the-dynamics-of-implied-volatilities-a-common-principal-components-xl7aRg1OMo
SP - 179
EP - 202
VL - 6
IS - 3
DP - DeepDyve
ER -