Intraday Volatility Surface Calibration

Abstract: On the financial markets, investors search to achieve their economical goals while simultaneously being exposed to minimal risk. Volatility surfaces are used for estimating options' implied volatilities and corresponding option prices, which are used for various risk calculations. Currently, volatility surfaces are constructed based on yesterday's market information and are used for estimating options' implied volatilities today. Such a construction gets redundant very fast during periods of high volatility, which leads to inaccurate risk calculations. With an aim to reduce volatility surfaces' estimation errors, this thesis explores the possibilities of calibrating volatility surfaces intraday using incomplete market information. Through statistical analysis of the volatility surfaces' historical movements, characteristics are identified showing sections with resembling motion patterns. These insights are used to adjust the volatility surfaces intraday. The results of this thesis show that calibrating the volatility surfaces intraday can reduce the estimation errors significantly during periods of both high and low volatility. However, these results highly depend on the conducted choices when constructing and analyzing the volatility surfaces which leave room for further reasearch.