Constructing volatility surfaces for managed funds

In this dissertation, a methodology is developed for constructing a volatility surface for a managed fund by extending the work of Bakshi et al. (2003) and Taylor (2014). The power utility assumption (with constant relative risk aversion for a specific maturity) and historical returns series data are used for the identified factors in influencing the return of the fund and the fund itself. The coefficient of relative risk aversion for a specific maturity and market is estimated from quoted option prices on a market index. This is used in combination with the identified factors and fund return series to estimate the risk-neutral skewness of the fund. An optimisation procedure is then used to determine the volatility smile of the fund for a specific maturity. Thereafter, the volatility surface of the fund is constructed by repeating each step for different maturities. Although this methodology produces sensible results, the optimisation routine used is sensitive to initial values and constraints.

Grantor dc:publisher.institution

Division of Actuarial Science

Year dc:date.issued

2014

Author dc:creator

• Brinkman, Trevor Joseph

Advisors dc:contributor.advisor

• Van Rooyen, Marchand
• Innocenzi, Paolo

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/11427/8530

OAI identifier oai:identifier

oai:open.uct.ac.za:11427/8530