Realised Volatility Moments Implied by Options with Applications to the Pricing of Realised Volatility Options

15 Pages Posted: 17 Jun 2024

See all articles by Frido Rolloos

Frido Rolloos

Independent

Kenichiro Shiraya

University of Tokyo - Graduate School of Economics

Date Written: May 24, 2024

Abstract

For small values of correlation a method is given to de-correlate the instantaneous volatility from the price process in stochastic volatility models. The result of the de-correlation is that the implied volatility skew is rotated into a smile. Once the implied volatility skew has been ``symmetrised", moments of realised volatility are implied from the symmetrised asset option prices. The implied moments are subsequently used in a Gram-Charlier expansion of the density of realised volatility. The Gram-Charlier density provides approximate prices for options on realised volatility and other volatility derivatives.

Keywords: Volatility, options, implied volatility, stochastic volatility, volatility derivatives

Suggested Citation

Rolloos, Frido and Shiraya, Kenichiro, Realised Volatility Moments Implied by Options with Applications to the Pricing of Realised Volatility Options (May 24, 2024). Available at SSRN: https://ssrn.com/abstract=4840162 or http://dx.doi.org/10.2139/ssrn.4840162

Kenichiro Shiraya

University of Tokyo - Graduate School of Economics

Tokyo
Japan

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