Economics at your fingertips  

Arbitrage Free Approximations to Candidate Volatility Surface Quotations

Dilip B. Madan () and Wim Schoutens ()
Additional contact information
Dilip B. Madan: Robert H. Smith School of Business, University of Maryland, College Park, MD 20742, USA
Wim Schoutens: Department of Mathematics, KU Leuven, 3000 Leuven, Belgium

Journal of Risk and Financial Management, 2019, vol. 12, issue 2, 1-21

Abstract: It is argued that the growth in the breadth of option strikes traded after the financial crisis of 2008 poses difficulties for the use of Fourier inversion methodologies in volatility surface calibration. Continuous time Markov chain approximations are proposed as an alternative. They are shown to be adequate, competitive, and stable though slow for the moment. Further research can be devoted to speed enhancements. The Markov chain approximation is general and not constrained to processes with independent increments. Calibrations are illustrated for data on 2695 options across 28 maturities for S P Y as at 8 February 2018.

Keywords: bilateral gamma; fast Fourier transform; sato process; matrix exponentials (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2019
References: View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf) (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

Journal of Risk and Financial Management is currently edited by Prof. Dr. Michael McAleer

More articles in Journal of Risk and Financial Management from MDPI, Open Access Journal
Bibliographic data for series maintained by XML Conversion Team ().

Page updated 2019-05-18
Handle: RePEc:gam:jjrfmx:v:12:y:2019:i:2:p:69-:d:224708