Management Science and Financial Engineering

The Korean Operations Research and Management Science Society (한국경영과학회)
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Implied Volatility Function Approximation with Korean ELWs (Equity-Linked Warrants) via Gaussian Processes

  • Han, Gyu-Sik (Division of Business Administration, Chonbuk National University)
  • Received : 2014.05.15
  • Accepted : 2014.05.20
  • Published : 2014.05.30
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Abstract

A lot of researches have been conducted to estimate the volatility smile effect shown in the option market. This paper proposes a method to approximate an implied volatility function, given noisy real market option data. To construct an implied volatility function, we use Gaussian Processes (GPs). Their output values are implied volatilities while moneyness values (the ratios of strike price to underlying asset price) and time to maturities are as their input values. To show the performances of our proposed method, we conduct experimental simulations with Korean Equity-Linked Warrant (ELW) market data as well as toy data.

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