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Parametric Modeling of Implied Smile Functions: A Generalized SVI Model

30 Pages Posted: 12 May 2012  

Bo Zhao

City University London - Sir John Cass Business School

Stewart D. Hodges

University of Warwick - Financial Options Research Centre (FORC)

Date Written: August 16, 2011

Abstract

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

Suggested Citation

Zhao, Bo and Hodges, Stewart D., Parametric Modeling of Implied Smile Functions: A Generalized SVI Model (August 16, 2011). Review of Derivatives Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2056523

Bo Zhao (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Stewart Hodges

University of Warwick - Financial Options Research Centre (FORC) ( email )

Warwick Business School
Coventry CV4 7AL
United Kingdom
01203-523606 (Phone)

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