Practical Timing of Implied Volatility Marks and Local Volatility Calibration
Summary
The document asks how often equity derivatives desks update implied volatility surfaces and recalibrate local volatility for exotic option pricing and risk management. It highlights a practical trade-off: refreshing calibrations more often can reflect new market information, while repeated calibration across many underliers may require substantial computation.
The answer is based on one practitioner’s experience on a single-name equity derivatives desk. Implied volatility was marked at least daily, usually at the end of the day, then checked again after the market opened. During the day, risk calculations mostly used the previous end-of-day local volatility calibration. The practitioner notes that market movements, volatility changes, trading volume, and current conditions can alter this routine. The account is a desk-specific observation, not a universal policy; it gives no timing benchmarks, computation measurements, or detailed calibration procedure.
Key ideas
- Implied volatility surfaces may be marked daily and checked again after the open.
- Market movements, volatility changes, and trading volume can affect how often marks are reviewed.
- In the practitioner’s account, intraday risk work mostly reused the prior end-of-day local volatility calibration.
- Desk routines vary with market conditions, so the account should not be treated as a universal standard.
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Full text
# How frequently is local volatility calibrated to implied vol surface, in practice? # How frequently is local volatility calibrated to implied vol surface, in practice? This has two related questions - - How frequently do equity derivative traders re-mark the implied volatility surface - (i) once a day (e.g. at start of trading day, or end-of-day), or (ii) multiple times a day depending on market observability of the underlying vanilla options? - Given the implied vol surface has been marked, how frequently do large banks with large equity exotics books recalibrate the local volatility - (i) once a day, compute the parametrized functional form (e.g. coefficients of a polynomial in S and t), and use the same through out the day for submitting quotes to clients. Essentially, while the undelying stock price would be the latest intra day value in the exchange, the local volatility functions will saved in a database and remain unaltered intra-day. (ii) Or do they re-calibrate the local volatility again from the latest implied vol surface (as saved by traders in the database) for every trade. How about intra-day risk management - when the portfolios are re-valued and greeks re-calculated, are all the local volatilities for multiple underliers re-calibrated from implied vols or are they only using a prior end-of-day calibration of local volatility functions. My main concern is the computation time involved in calibrating local volatilities for a huge number of underliers, multiple times a day. Will it be computationally burdensome, in practice? ## Answer by Vitomir (score 5, accepted) https://quant.stackexchange.com/a/46146 I worked on a single name Equity Derivatives trading desk. Implied volatility is remarked at least once per day, but that depends also on market movements, volatility movements, volumes, etc. For this reason it is usually marked at the end of the day and re-checked after opening. About intra-day risk management, they mostly use a prior end-of-day calibration of local volatility functions, but again, depending on the current situation of the markets.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.