SVI volatility model is the most successful parametric implied vol model in the public domain. It bridges the gap between academia and industry. In this model, there are five parameters for each maturity (in the SVI-JW):

ATM vol, ATM skew, ATM curvature, left-wing slope, and right-wing slope.

The model has…

From 1970 to now, we have seen the development of volatility modeling, from constant volatility Black Scholes model to stochastic volatility model and local volatility model. Before we ask the question “what is the next-generation model,” we should ask ourselves: what are new good properties that the model should have…

Skew in the implied volatility surface usually means the implied volatility is negatively correlated to option strike. We can explain through many angles:

- leverage effect: when the stock price drops, the company has a greater leverage ratio, hence a greater volatility
- spot-vol correlation effect: volatility process is negative correlated with…

Pair trading is a simple trading idea famous 15 years ago. The 2 step methodology is simple. First, you find one pair of stocks moving together. Then you monitor the spread, and when the spread is greater than the threshold, you bet the spread gets smaller. The profit decay in…

Option market makers have two motivations to hedge: risk concerns and information concerns. Academia usually focuses on the first while neglecting the latter.

1. **Risk concerns**

Market makers earn the bid-ask spread of options. At the same time, market makers are risk-averse. Hence, when these market makers have too much…

The quantitative finance domain has already accepted some concepts from data science. For example, researchers usually limit the number of free parameters in their model because of overfitting. Another case is the usage of the out-of-sample test as a reliable estimate of strategy performance. Notwithstanding, the vol surface modeling community…

Jumps and stochastic volatility are two helpful refinements into Black Scholes’s arbitrage-free pricing paradigm. Mastering them would require advanced calculus and probability theory. Still, we will give an intuitive explanation of why we need jumps without any formula. …

Front-running is trading stock by a broker who has inside knowledge a future client transaction is about to affect its price. It is called front because the broker trades before clients. It is illegal, and the profits of the broker come from losses of clients.

What if the broker trade…

One factor might be useful only under some specific conditions and becomes random noise under other circumstances. The high alpha happens in a short period, but it is diluted by the long useless time, and it results in the alpha is insignificant on average. …

Volatility surfaces data is usually in a sparse, high dimensional space with limited data points. For example, if we have 500 underlying stocks, each single stock option has 20 maturities, and for each slice, we have 5 parameters (SVI curve). Then we have 50,000 parameters for each observation. If we…