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doi:10.22028/D291-30269
Title: | Arbitrage-free interpolation of call option prices |
Author(s): | Bender, Christian Thiel, Matthias |
Language: | English |
Title: | Statistics and Risk Modeling |
Startpage: | 1 |
Endpage: | 24 |
Publisher/Platform: | De Gruyter Oldenbourg |
Year of Publication: | 2020 |
Publikation type: | Journal Article |
Abstract: | In this paper, we introduce a new interpolation method for call option prices and implied volatilities with respect to the strike, which first generates, for fixed maturity, an implied volatility curve that is smooth and free of static arbitrage. Our interpolation method is based on a distortion of the call price function of an arbitrage-free financial “reference” model of one’s choice. It reproduces the call prices of the reference model if the market data is compatible with the model. Given a set of call prices for different strikes and maturities, we can construct a call price surface by using this one-dimensional interpolation method on every input maturity and interpolating the generated curves in the maturity dimension. We obtain the algorithm of N. Kahalé [An arbitrage-free interpolation of volatilities, Risk 17 2004, 5, 102–106] as a special case, when applying the Black–Scholes model as reference model. |
DOI of the first publication: | 10.1515/strm-2018-0026 |
URL of the first publication: | https://www.degruyter.com/view/j/strm.ahead-of-print/strm-2018-0026/strm-2018-0026.xml |
Link to this record: | hdl:20.500.11880/28712 http://dx.doi.org/10.22028/D291-30269 |
ISSN: | 2196-7040 0721-2631 2193-1402 |
Date of registration: | 17-Feb-2020 |
Faculty: | MI - Fakultät für Mathematik und Informatik |
Department: | MI - Mathematik |
Professorship: | MI - Prof. Dr. Christian Bender |
Collections: | SciDok - Der Wissenschaftsserver der Universität des Saarlandes |
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