A NOVEL METHOD FOR ARBITRAGE-FREE OPTION SURFACE CONSTRUCTION

Greg Orosi ()
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Greg Orosi: Department of Mathematics and Statistics, American University of Sharjah, Nab 254, P. O. Box 26666, Sharjah, UAE

Annals of Financial Economics (AFE), 2019, vol. 14, issue 04, 1-14

Abstract: In this paper, we provide an alternative framework for constructing an arbitrage-free European-style option surface. The main motivation for our work is that such a construction has rarely been achieved in the literature so far. The novelty of our approach is that we perform the calibration and interpolation in the put option space. To demonstrate the applicability of our technique, we extract the model-free implied volatility from S&P 500 index options. Subsequently, we compare its information content to that of the CBOE VIX index. Our empirical tests indicate that information content of the option-implied volatility values based on our method are superior to the VIX index.

Keywords: Arbitrage-free; European option; option surface; index option; VIX index (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1142/S2010495219500210

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