From volatility smiles to the volatility of volatility (Q2292044)
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English | From volatility smiles to the volatility of volatility |
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From volatility smiles to the volatility of volatility (English)
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31 January 2020
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The authors review models of the option surface and reduced-form models for stochastic volatility in continuous time, under the risk-neutral measure. They introduce ``forward volatilities'' (in analogy with forward interest rates in the term structure theory), and prove that such objects are conditional expected values, under the risk-neutral measure, of the future spot volatility. The theory developed here is the analogue of Heath-Jarrow-Morton bond-pricing theory. Moreover, a link is established between forward volatilities and the so-called ``model-free'' volatility measures.
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stochastic volatility
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implicit volatility
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forward volatility
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VIX
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