Capturing Smile Dynamics with the Quintic Volatility Model: SPX, Skew-Stickiness Ratio and VIX

Code

• github.com/shaunlinz02/two_factor_quintic_ou
  OfficialIn papernone★ 12

Abstract

We introduce the two-factor Quintic Ornstein-Uhlenbeck model, where volatility is modeled as a polynomial of degree five based on the sum of two Ornstein-Uhlenbeck processes driven by the same Brownian Motion, each mean-reverting at a different speed. We demonstrate that the Quintic model effectively captures the volatility surfaces of SPX and VIX while aligning with the skew-stickiness ratio (SSR) across maturities ranging from a few days to over two years. Furthermore, the Quintic model shows consistency with key empirical stylized facts, notably reproducing the Zumbach effect.

Reproductions