Implied Volatility Smiles

Heath-Jarrow-Morton meet lifted Heston in energy markets for joint historical and implied calibration ArXiv ID: 2501.05975 “View on arXiv” Authors: Unknown Abstract In energy markets, joint historical and implied calibration is of paramount importance for practitioners yet notoriously challenging due to the need to align historical correlations of futures contracts with implied volatility smiles from the option market. We address this crucial problem with a parsimonious multiplicative multi-factor Heath-Jarrow-Morton (HJM) model for forward curves, combined with a stochastic volatility factor coming from the Lifted Heston model. We develop a sequential fast calibration procedure leveraging the Kemna-Vorst approximation of futures contracts: (i) historical correlations and the Variance Swap (VS) volatility term structure are captured through Level, Slope, and Curvature factors, (ii) the VS volatility term structure can then be corrected for a perfect match via a fixed-point algorithm, (iii) implied volatility smiles are calibrated using Fourier-based techniques. Our model displays remarkable joint historical and implied calibration fits - to both German power and TTF gas markets - and enables realistic interpolation within the implied volatility hypercube. ...

Option Smile Volatility and Implied Probabilities: Implications of Concavity in IV Curves ArXiv ID: 2307.15718 “View on arXiv” Authors: Unknown Abstract Earnings announcements (EADs) are corporate events that provide investors with fundamentally important information. The prospect of stock price rises may also contribute to EADs increased volatility. Using data on extremely short term options, we study that bimodality in the risk neutral distribution and concavity in the IV smiles are ubiquitous characteristics before an earnings announcement day. This study compares the returns between concave and non concave IV smiles to see if the concavity in the IV curve leads to any information about the risk in the market and showcases how investors hedge against extreme volatility during earnings announcements. In fact, our paper shows in the presence of concave IV smiles; investors pay a significant premium to hedge against the uncertainty caused by the forthcoming announcement. ...