Jul 31, 2022

Modeling Dynamics of Entire Implied Volatility Surface with Deep Learning

There is a very cool webinar coming up next week that I suggest everyone to register and attend link

Daniel Bloch, also often listed as Daniel Alexandre Bloch has contributed a lot of research on using ML for options pricing. Also Mr Block published a very thorough free textbook options pricing that I highly recommend to everyone - it reviews and evaluates most of the recent developments in options pricing.

Below I will review their paper from last year on the topic, sort of what you can expect from the webinar:

Here the authors are actually tackling the forecasting problem - how to forecast options prices. Since options prices are in constant basis movement - meaning time to expiration changes, moneyness changes, and the number of options is never fixed, they need to parametrize the entire volatility surface, and model those parameters. Here in the full "recipe":


1 - S&P data from 2012 to 2019 inclusive

2 - Fit SVI to each expiration slice

3 - Interpolate 8 fixed-maturity slices for 7, 14, 21, 30, 60, 90, 120, 180 calendar days to expiration, and 50 fixed log-moneyness "strikes" from -0.2 to +0.2 ( my comment: I don't understand why do they need fixed strikes, they should be fitting SVI to all strikes )

4 - 8 fixed maturity slices * 5 SVI parameters = 40 total parameters

5 - LTSM + Convolution NN, as below ( my comment : I think ...6,5 ... is a typo, should be  8,5 )

 

 

 

 

 

 

 

 

 

 

 

 

The authors note that the model seems to be under performing for very short maturities under 1 week, which makes sense because the model seem to be optimized for medium-term. Short maturities are dominated by noise, and would probably benefit from intraday data, or some different form of optimization.

Anyways - read the paper, attend the webinar, I highly recommend both. What should be notes is that this is a general recipe - the same can be applied to the VIX complex - either to futures only, or futures + options in static levels.


In 1939 and 1940 Mahatma Gandhi, the great Indian statesman wrote to Hitler, referring to him as "dear friend" , and writing that Hitler "... nor do we believe that you are the monster described by your opponents" 

Gandhi wrote to the British Viceroy in 1940 "This manslaughter must be stopped. You are losing; if you persist, it will only result in greater bloodshed. Hitler is not a bad man" 

In 1947 he stated "the Jews should have offered themselves to the butcher’s knife. They should have thrown themselves into the sea from cliffs."

I hope everyone can see how erroneous or misguided these statements were ... 

At the same time Winston Churchill wrote "Nations that went down fighting rose again, but those who surrendered tamely were finished," and called his compatriots: "War is horrible, but slavery is worse"

Be like Churchill, not like Gandhi! I am asking my US readers to make three phonecalls to

Congressman Mike Rogers, Armed Services Committee
+1 202-225-3261

Rep. Adam Smith, Chairman of the House Armed Services
+1 425-793-5180

Congressman Michael McCaul, Foreign Affairs Committee
+1 202-225-2401

to support Ukrainian struggle again Russian tyranny and imperialism. If you live in a different country I ask you to call your government representatives.