Perhaps someone can clarify a few points for me re Emanuel Dermanâs paper, âModeling the Volatility Smileâ ,October 2006 http://finmath.stanford.edu/seminars/documents/Stanford.Smile.Derman.pdf
Generally, how is the volatility of volatility determined (I can determine implied by iteration)?
How do I reconcile these statements (page 6):âVolatility of Implied Volatility Decreases with Expirationâ and âShort-term implied volatilities are more volatileâ? Presumably, (short-term, reducing ) volatility of implied is derived from (short-term, more volatile) implieds?
Continuing from above: âThis suggests mean reversion or stationarity â¦â. âStationarityâ is not in my English dictionary (probably in an American). Does this mean stationary? If so, which is it â mean reverting or stationary? Or have quants embraced aspect of quantum physics, now?
Continuing from the points above (page 13): âas assets approach liabilities, equity volatility increasesâ. Iâm assuming here âassetsâ could refer to the underlying and âliabilitiesâ refers to strikes. Again, this appears to conflict with âVolatility of Implied Volatility Decreases with Expirationâ assuming underlying volatility necessarily transfers to its derivatives.
The Quantitative Strategies Research Notes he jointly produced while at Goldman Sachs are models of clarity and lucidity for the mathematically challenged (myself). Donât know what happened with this one.
Any help greatly appreciated. Thank you in advance.
Grant.
Generally, how is the volatility of volatility determined (I can determine implied by iteration)?
How do I reconcile these statements (page 6):âVolatility of Implied Volatility Decreases with Expirationâ and âShort-term implied volatilities are more volatileâ? Presumably, (short-term, reducing ) volatility of implied is derived from (short-term, more volatile) implieds?
Continuing from above: âThis suggests mean reversion or stationarity â¦â. âStationarityâ is not in my English dictionary (probably in an American). Does this mean stationary? If so, which is it â mean reverting or stationary? Or have quants embraced aspect of quantum physics, now?
Continuing from the points above (page 13): âas assets approach liabilities, equity volatility increasesâ. Iâm assuming here âassetsâ could refer to the underlying and âliabilitiesâ refers to strikes. Again, this appears to conflict with âVolatility of Implied Volatility Decreases with Expirationâ assuming underlying volatility necessarily transfers to its derivatives.
The Quantitative Strategies Research Notes he jointly produced while at Goldman Sachs are models of clarity and lucidity for the mathematically challenged (myself). Donât know what happened with this one.
Any help greatly appreciated. Thank you in advance.
Grant.