Smile Dynamics III

Abstract

In two previous articles, we assessed the structural limitations of existing models for equity derivatives and introduced a new model based on the direct modelling of the joint dynamics of the spot and the implied variance swap volatilities. Here we present new work on an extension of this model which, while remaining Markovian, provides control on the smile of forward variances and can be calibrated to VIX futures and options.

JEL Classification: G13