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A. Dufays, K. Jacobs, and J. Rombouts: A Framework for Real-Time Modeling and Forecasting of Large Unbalanced Option Implied Volatility Surfaces

June 17, 2025

Forecasting the option implied volatility (IV) surface is difficult with standard time series models because of its time-varying granularity. We propose a new two-step real-time sequential forecasting framework. The first step fits the daily surface and can accommodate any underlying specification for option prices or IVs, including dynamic option pricing models, non-parametric methods, and machine learning techniques. In the second step, we sequentially estimate a dynamic IV model using an updating rule. Our framework can accommodate large datasets and high data frequencies. An empirical application on S&P 500 IV surfaces shows that our approach significantly outperforms random walk forecasts.

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