BUILDING ARBITRAGE-FREE IMPLIED VOLATILITY: SINKHORN'S ALGORITHM AND VARIANTS

Hadrien de March () and Pierre Henry-Labordere ()
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Hadrien de March: CMAP - Centre de Mathématiques Appliquées de l'Ecole polytechnique - Inria - Institut National de Recherche en Informatique et en Automatique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique
Pierre Henry-Labordere: SOCIETE GENERALE - Equity Derivatives Research Societe Generale - Société Générale

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Abstract: We consider the classical problem of building an arbitrage-free implied volatility surface from bid-ask quotes. We design a fast numerical procedure, for which we prove the convergence, based on the Sinkhorn algorithm that has been recently used to solve efficiently (martingale) optimal transport problems.

Date: 2019-02-08
New Economics Papers: this item is included in nep-cmp and nep-rmg
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