A Semi-Closed Form Approximation of Arbitrage-Free Call Option Price Surface

Arindam Kundu (), Sumit Kumar () and Nutan Kumar Tomar ()
Additional contact information
Arindam Kundu: Adamas University
Sumit Kumar: Indian Institute of Management Udaipur
Nutan Kumar Tomar: Indian Institute of Technology Patna

Computational Economics, 2024, vol. 63, issue 4, No 5, 1457 pages

Abstract: Abstract The two-dimensional estimation problem of the arbitrage-free option price surface from available best bid-ask quotes is difficult to solve due to insufficient as well as skewed quotes for various strikes and maturities besides the prevalence of arbitrage opportunities in the observed quotes. This article presents a semi-closed form approximation for constructing an arbitrage-free European call option price surface from the observed quotes. The estimated option pricing surface is represented as an interpolation-based convex combination of shape-restricted Bernstein polynomials. A fast and straightforward surface-fitting algorithm is presented based on the quadratic programming method. This research also includes a simulation utilizing the Heston stochastic volatility model to evaluate the proposed method. The empirical applicability of the proposed method is demonstrated using S&P 500 call option price data.

Keywords: Option pricing; No-arbitrage conditions; Bernstein polynomial; Finite dimensional constrained least squares; Quadratic programming; Monte-Carlo simulation (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10614-023-10368-5 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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: https://EconPapers.repec.org/RePEc:kap:compec:v:63:y:2024:i:4:d:10.1007_s10614-023-10368-5

Ordering information: This journal article can be ordered from
http://www.springer. ... ry/journal/10614/PS2

DOI: 10.1007/s10614-023-10368-5

Access Statistics for this article

Computational Economics is currently edited by Hans Amman

More articles in Computational Economics from Springer, Society for Computational Economics Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().