DSFM fitting of implied volatility surfaces

Abstract

Implied volatility is one of the key issues in modern quantitative finance, since plain vanilla option prices contain vital information for pricing and hedging of exotic and illiquid options. European plain vanilla options are nowadays widely traded, which results in a great amount of high-dimensional data especially on an intra day level. The data reveal a degenerated string structure. Dynamic semiparametric factor models (DSFM) are tailored to handle complex, degenerated data and yield low dimensional representations of the implied volatility surface (IVS). We discuss estimation issues of the model and apply it to DAX option prices.