Simulation of Arbitrage-Free Implied Volatility Surfaces

Rama Cont and Milena Vuletić

Applied Mathematical Finance, 2023, vol. 30, issue 2, 94-121

Abstract: We present a computationally tractable method for simulating arbitrage-free implied volatility surfaces. We illustrate how our method may be combined with a data-driven model based on historical SPX implied volatility data to generate dynamic scenarios for arbitrage-free implied volatility surfaces. Our approach conciliates static arbitrage constraints with a realistic representation of statistical properties of implied volatility co-movements.

Date: 2023
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DOI: 10.1080/1350486X.2023.2277960

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