Cutting edge intro: history in the modelling
Volatility models do a great job of either capturing the rich dynamics of implied volatility or calibrating exactly to the market smile, but never both. Path-dependent volatility models can avoid this trade-off and capture historical patterns, but they are often neglected. Nazneen Sherif introduces this month’s technical articles
Quants sometimes turn to physics to tackle the challenges of financial modelling - a move often criticised for introducing complexity and unintuitive parameters into models. In our first technical, Path-dependent volatility, Julien Guyon, senior quant at Bloomberg, introduces a path-dependent volatility (PDV) framework that is calibrated using a technique commonly applied to the study of particle interactions in physics and shows it can capture the relevant dynamics using a single driver.
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