Numerical Approximation of the Implied Volatility Under Arithmetic Brownian Motion

Jaehyuk Choi, Kwangmoon Kim and Minsuk Kwak

Applied Mathematical Finance, 2009, vol. 16, issue 3, 261-268

Abstract: We provide an accurate approximation method for inverting an option price to the implied volatility under arithmetic Brownian motion, which is widely quoted in Fixed Income markets. The maximum error in the volatility is in the order of 10-10 of the given option price and much smaller for the near-the-money options. Thus our approximation can be used as an exact solution without further refinements of iterative methods.

Keywords: Normal implied volatility; basis point volatility; arithmetic Brownian motion; rational approximation; closed form approximation (search for similar items in EconPapers)
Date: 2009
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DOI: 10.1080/13504860802583436

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