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Arbitrage-free smoothing of the implied volatility surface
[Zeitschriftenartikel]
Abstract The pricing accuracy and pricing performance of local volatility models depend on the absence of arbitrage in the implied volatility surface. An input implied volatility surface that is not arbitrage-free can result in negative transition probabilities and consequently into mispricings and false gre... mehr
The pricing accuracy and pricing performance of local volatility models depend on the absence of arbitrage in the implied volatility surface. An input implied volatility surface that is not arbitrage-free can result in negative transition probabilities and consequently into mispricings and false greeks. We propose an approach for smoothing the implied volatility smile in an arbitrage-free way. The method is simple to implement, computationally cheap and builds on the well-founded theory of natural smoothing splines under suitable shape constraints.... weniger
Klassifikation
Wirtschaftsstatistik, Ökonometrie, Wirtschaftsinformatik
Allgemeines, spezielle Theorien und "Schulen", Methoden, Entwicklung und Geschichte der Wirtschaftswissenschaften
Methode
Theorieanwendung
Freie Schlagwörter
Implied volatility surface; Local volatility; Cubic spline smoothing; No-arbitrage constraints
Sprache Dokument
Englisch
Publikationsjahr
2009
Seitenangabe
S. 417-428
Zeitschriftentitel
Quantitative Finance, 9 (2009) 4
DOI
https://doi.org/10.1080/14697680802595585
Status
Postprint; begutachtet (peer reviewed)
Lizenz
PEER Licence Agreement (applicable only to documents from PEER project)