Problem
Research questions and friction points this paper is trying to address.
Implied Volatility Surface
Option Pricing
Risk Management
Universal Diffusion Models for Implied Volatility Surfaces: Learning Shared Dynamics Across Stocks
π€ AI Summary
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π Abstract
Modeling the dynamics of option implied volatility surface (IVS) is crucial for pricing, hedging, and risk-managing option portfolios. We develop a universal conditional diffusion model that learns to jointly generate next-day IVS increments and the underlying stock's returns. The model is trained on pooled data from 50 stocks and evaluated on a test set comprising 50 in-sample stocks and 50 out-of-sample stocks excluded from training. The training objective is primarily the minimization of MSE, with the variants that jointly impose surface smoothness, and that penalize the presence of static-arbitrage, which are all economically meaningful constraints. Across in-sample and out-of-sample stocks, our diffusion model outperforms the VolGAN benchmark in reducing arbitrage violations, improving stock risk prediction, and aligning explained variance ratios by the first three principal components. The fact that the model extrapolates well to stocks that are excluded from training indicates that the learned dynamics can be shared across stocks. These findings support a universal conditional diffusion as a credible framework for multi-stock implied volatility surface scenario generation.
Innovation
Methods, ideas, or system contributions that make the work stand out.
Universal Conditional Diffusion Model
Implied Volatility Surface
Stock Returns Prediction
Static-Arbitrage Penalties
Shared Dynamics
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