Abstract
This empirical study is motivated by the literature on “smile-consistent” arbitrage pricing with stochastic volatility. We investigate the number and shape of shocks that move implied volatility smiles and surfaces by applying Principal Components Analysis. Two components are identified under a variety of criteria. Subsequently, we develop a “Procrustes” type rotation in order to interpret the retained components. The results have implications for both option pricing and hedging and for the economics of option pricing.
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Skiadopoulos, G., Hodges, S. & Clewlow, L. The Dynamics of the S&P 500 Implied Volatility Surface. Review of Derivatives Research 3, 263–282 (2000). https://doi.org/10.1023/A:1009642705121
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DOI: https://doi.org/10.1023/A:1009642705121