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

Abstract

We introduce the two-factor Quintic Ornstein-Uhlenbeck (OU) model, where volatility is modelled as a degree-five polynomial of the sum of two Ornstein-Uhlenbeck processes driven by the same Brownian motion, each mean-reverting at a different speed. We demonstrate that the 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, it is consistent with key empirical stylized facts, notably reproducing the Zumbach effect.