Arbitrage filtering of option prices: a simple real-time approach

Karim Moussa

Quantitative Finance, 2026, vol. 26, issue 3, 325-340

Abstract: This paper presents a simple arbitrage filtering method for preprocessing European option quotes. Prices are modified only when basic no-arbitrage conditions are violated, and no quotes are discarded. Instead, quotes are adjusted using information from other, more liquid quotes. This process is iterative and continues until all violations are resolved. The filter is shown to minimize an intuitive objective function, and local optimality properties are established, relating to the most liquid quotes. The method is straightforward to implement and fast, making it particularly suitable for real-time applications. Numerical examples illustrate key filtering properties, including the tendency to produce sparse solutions that leave many quotes unchanged, as well as its robustness to outliers.

Date: 2026
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DOI: 10.1080/14697688.2025.2574907

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