Financial Engineering Workshop - Pascal François (HEC Montréal)

Presentation title: Joint Dynamics for the Underlying Asset and its Implied Volatility Surface: A New Methodology for Option Risk Management

Abstract: This paper develops a dynamic joint model of the implied volatility (IV) surface and its underlying asset which is tractable and seamless to estimate. It combines an asymptotically well-behaved, parametric IV surface representation with a two-component variance, and non-Gaussian asymmetric GARCH specification for the underlying asset returns. Estimated on S&P 500 index return and option data for the 1996-2020 period, the model captures the IV surface movements well and uses them to obtain an improved fit on index returns. It also proves to be an effective risk management tool, producing reliable Value-at-Risk estimates for straddle and strangle positions, and accurate forecasts of the VIX distribution.

Joint with Rémi Galarneau-Vincent (HEC Montréal), Geneviève Gauthier (HEC Montréal & Oxford Man Institute of Quantitative Finance) and Frédéric Godin (Concordia University)

Bio: Pascal François is Full Professor of Finance at HEC Montréal. He is the founding director of the Canadian Derivatives Institute, which he ran for nine years. He served as co-editor-in-chief of Finance, the academic journal of the French Finance Association. His research work appeared in the Journal of Business, the Journal of Financial and Quantitative Analysis, and the Journal of Banking and Finance among others. Pascal is the author of several textbooks on derivatives and corporate finance, and, more lately, of a professional reference guide to portfolio performance. He is the COO of Delta Vega, a Canadian start-up specialized in the risk scoring of structured products. He graduated from ESSEC and holds a joint Ph.D. from Sorbonne University and ESSEC.

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