Volatility Arbitrage and Model Calibration

Ilia Bouchouev
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Ilia Bouchouev: Pentathlon Investments, LLC

Chapter 12 in Virtual Barrels, 2023, pp 257-280 from Springer

Abstract: Abstract This chapter focuses on the important problem of model calibration. We present the bootstrapping method for calibrating volatility time-dependency and back out market-implied probability distribution from option prices. We then outline a more difficult problem of reconstructing the underlying diffusion process. Some readers may find it interesting that this problem, known as the inverse problem of option pricing, in its general case presents a rare example of an unsolved mathematical problem.

Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sptchp:978-3-031-36151-7_12

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DOI: 10.1007/978-3-031-36151-7_12

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