Diffusion models for dynamic volatility surface generation and data-driven hedging

RESUMO

We develop a diffusion-model framework for dynamic implied-volatility surface generation and evaluate its economic usefulness through data-driven hedging, using daily SPX option data from 2000 to 2023. The diffusion-based hedges maintain tracking errors near zero, substantially reduce tail risk, and exhibit particularly stable performance during the COVID-19 market disruption.