Work

Simulation of Arbitrage-Free Implied Volatility Surfaces

Year: 2023

Type: article

Abstract: We present a computationally tractable method for simulating arbitrage-free implied volatility surfaces. We illustrate how our method may be combined with a data-driven model based on historical SPX implied volatility data to generate dynamic scenarios for arbitrage-free implied volatility surfaces. Our approach conciliates static arbitrage constraints with a realistic representation of statistical properties of implied volatility co-movements.

Source: Applied Mathematical Finance

DOI: 10.1080/1350486x.2023.2277960

Authors: Rama Cont, Milena Vuletić

Institution: University of Oxford

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Funders: BNP Paribas Cardif, Engineering and Physical Sciences Research Council

Awards: G1600321425, EPSRC Centre for Doctoral Training in Mathematics of Random Systems: Analysis, Modelling and Simulation