@techreport{Fengler2003Implied,
abstract = {A primary goal in modelling the dynamics of implied volatility surfaces (IVS) aims at reducing complexity. For this purpose one fits the IVS each day and applies a principal component analysis using a functional norm. This approach, however, neglects the degenerated string structure of the implied volatility data and may result in a severe modelling bias. We propose a dynamic semiparametric factor model, which approximates the IVS in a finite dimensional function space. The key feature is that we only fit in the local neighborhood of the design points. Our approach is a combination of methods from functional principal component analysis and backfitting techniques for additive models. The model is found to have an approximate 10% better performance than the typical na&#x0308;ive trader models. The model can be a backbone in risk management serving for value at risk computations and scenario analysis.},
address = {Berlin},
author = {Matthias R. Fengler and Wolfgang H\"{a}rdle and Enno Mammen},
copyright = {http://www.econstor.eu/dspace/Nutzungsbedingungen},
keywords = {C14; G12; 330; Implied Volatility Surface; Smile; Generalized Additive Models; Backfitting; Functional Principal Component Analysis},
language = {eng},
note = {urn:nbn:de:kobv:11-10050885},
number = {2003,54},
publisher = {Humboldt-Universit\"{a}t},
title = {Implied volatility string dynamics},
type = {Discussion Papers, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes},
url = {http://hdl.handle.net/10419/66280},
year = {2003}
}
