FuNVol: A Multi-Asset Implied Volatility Market Simulator using Functional Principal Components and Neural SDEs

03/01/2023

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by   Vedant Choudhary, et al.

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This paper introduces a new approach for generating sequences of implied volatility (IV) surfaces across multiple assets that is faithful to historical prices. We do so using a combination of functional data analysis and neural stochastic differential equations (SDEs) combined with a probability integral transform penalty to reduce model misspecification. We demonstrate that learning the joint dynamics of IV surfaces and prices produces market scenarios that are consistent with historical features and lie within the sub-manifold of surfaces that are free of static arbitrage.