English, Article edition: Arbitrage-free smoothing of the implied volatility surface Matthias Fengler

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Physical Description
  • article
Language
  • English

Edition details

Title
  • Arbitrage-free smoothing of the implied volatility surface
Author
  • Matthias Fengler
Physical Description
  • article
Notes
  • The pricing accuracy and pricing performance of local volatility models depends on the absence of arbitrage in the implied volatility surface. An input implied volatility surface that is not arbitrage-free can result in negative transition probabilities and consequently mispricings and false greeks. We propose an approach for smoothing the implied volatility smile in an arbitrage-free way. The method is simple to implement, computationally cheap and builds on the well-founded theory of natural smoothing splines under suitable shape constraints.
  • Implied volatility surface, Local volatility, Cubic spline smoothing, No-arbitrage constraints,
  • RePEc:taf:quantf:v:9:y:2009:i:4:p:417-428
Language
  • English
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