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@article{ Fengler2009, title = {Arbitrage-free smoothing of the implied volatility surface}, author = {Fengler, Matthias}, journal = {Quantitative Finance}, number = {4}, pages = {417-428}, volume = {9}, year = {2009}, doi = {https://doi.org/10.1080/14697680802595585}, urn = {https://nbn-resolving.org/urn:nbn:de:0168-ssoar-221375}, 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 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.}, }