Parametric Modeling of Implied Smile Functions: A Generalized SVI Model
30 Pages Posted: 12 May 2012
Date Written: August 16, 2011
In this paper, we propose a parametric model of implied variance which is a natural generalization of the SVI model. The model improves the SVI by allowing more flexibly the negative curvature in the tails which is justified both theoretically and empirically. The fitting of the model, comparing with the other competing parametric models (SVI, SABR), to the implied volatility smile and the risk neutral density function is tested on SPX options.
Keywords: Implied volatility, Parametric model, Kummer function, SVI model
JEL Classification: C51, C52, C60
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