Estimating Long Term Equity Implied Volatility

Crawford, Danielle Ana

Estimating Long Term Equity Implied Volatility

Master Thesis

2019

Abstract

Estimating and extrapolating long term equity implied volatilities is of importance in the investment and insurance industry, where ’long term’ refers to periods of ten to thirty years. Market-consistent calibration is difficult to perform in the South African market due to lack of long term liquid tradable derivatives. In this case, practitioners have to estimate the implied volatility surface across a range of expiries and moneyness levels. A detailed evaluation is performed for different estimation techniques to assess the strengths and weaknesses of each of the models. The estimation techniques considered include statistical and time-series techniques, non-parametric techniques and three potential methods which use the local volatility model.

Keywords

risk management

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