9 Dimensionality Reduction and Implied Volatility Forecasting
In this chapter we apply the methodologies of linear and nonlinear principal component dimensionality reduction to observed volatilities on Hong Kong and United States swap options of differing maturities, of one to ten years, to see if these methods help us to find the underlying volatility signal from the market. The methods are presented in Section 2.6.
Obtaining an accurate measure of the market volatility, when in fact there are many different market volatility measures or alternative nonmarket measures of volatility to choose from, is a major task for effective option pricing and related hedging activities. A major focus in financial market research today is volatility, rather ...
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