Model-free stochastic collocation for an arbitrage-free implied volatility: Part I

Fabien Floc’h () and Cornelis Oosterlee
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Fabien Floc’h: TU Delft

Decisions in Economics and Finance, 2019, vol. 42, issue 2, No 14, 679-714

Abstract: Abstract This paper explains how to calibrate a stochastic collocation polynomial against market option prices directly. The method is first applied to the interpolation of short-maturity equity option prices in a fully arbitrage-free manner and then to the joint calibration of the constant maturity swap convexity adjustments with the interest rate swaptions smile. To conclude, we explore some limitations of the stochastic collocation technique.

Keywords: Stochastic collocation; Implied volatility; Quantitative finance; Arbitrage-free; Risk-neutral density (search for similar items in EconPapers)
JEL-codes: C63 G13 G17 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (2)

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Journal Article: Model-Free Stochastic Collocation for an Arbitrage-Free Implied Volatility, Part II (2019)
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DOI: 10.1007/s10203-019-00238-x

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