Uncertainty of Volatility Estimates from Heston Greeks

Frontiers in Applied Mathematics and Statistics

Pfante, Oliver¹  Bertschinger, Nils¹ 

[1] Systemic Risk Group, Frankfurt Institute for Advanced Studies, Germany

关键词: Fisher information;    Stochastic volatility;    Heston model;    Greeks;    option pricing;    Fractional Fourier transform;   

DOI  :  10.3389/fams.2017.00027

学科分类：数学（综合）

来源: Frontiers

【 摘 要 】

Volatility is a widely recognized measure of market risk. As volatility is not observed it has to be estimated from market prices, i.e. as the implied volatility from option prices. The volatility index VIX making volatility a tradeable asset in its own right is computed from near- and next-term put and call options on the S&P 500 with more than 23 days and less than 37 days to expiration and non-vanishing bid. In the present paper we quantify the information content of the constituents of the VIX about the volatility of the S&P 500 in terms of the Fisher information matrix. Assuming that observed option prices are centred on the theoretical price provided by Heston's model perturbed by additive Gaussian noise we relate their Fisher information matrix to the Greeks in the Heston model. We find that the prices of options contained in the VIX basket allow for reliable estimates of the volatility of the S&P 500 with negligible uncertainty as long as volatility is large enough. Interestingly, if volatility drops below a critical value of roughly 3%, inferences from option prices become imprecise because Vega, the derivative of a European option w.r.t. volatility, nearly vanishes.

【 授权许可】

CC BY