A Survey on Implied Theories : The Volatility Models
36 Pages Posted: 15 Jul 2004 Last revised: 21 Jun 2015
Date Written: August 1, 2002
This paper is the first illustrated review of literature on local and implied volatility. It presents and discusses both concepts that are central in risk management. If local volatility is a relatively recent concept, implied volatility has emerged in the 70's as a global measure of uncertainty in the economy, typically used to calibrate option theoretical prices to market prices. Local volatilities has appeared in the mid 90's as a forward or instantaneous measure of volatility. This work displays the feature of each volatility model and highlights the role of all the structural parameters that drive the volatility process.
Keywords: Implied Volatility, Local Volatility, Stochastic Volatility, GARCH Volatility, Smile, Skew
JEL Classification: C13, G13
Suggested Citation: Suggested Citation