Options are often priced by Black and Scholes model by using artificial (and unobserved) volatility implied by option market prices. Since many options do not have their traded counterparts with the same maturity and moneyness, it is often needed to interpolate the volatility values. The general procedure of implied volatility extraction from market prices and subsequent smoothing can, however, lead to inconsistent values or even arbitrage opportunities. In this paper, a potential arbitrage area is studied in connection with the calendar bandwidth construction.

(2015). The arbitrage inconsistencies of implied volatility extraction in connection to calendar bandwidth [conference presentation - intervento a convegno]. Retrieved from http://hdl.handle.net/10446/55224

The arbitrage inconsistencies of implied volatility extraction in connection to calendar bandwidth

VITALI, Sebastiano;
2015

Abstract

Options are often priced by Black and Scholes model by using artificial (and unobserved) volatility implied by option market prices. Since many options do not have their traded counterparts with the same maturity and moneyness, it is often needed to interpolate the volatility values. The general procedure of implied volatility extraction from market prices and subsequent smoothing can, however, lead to inconsistent values or even arbitrage opportunities. In this paper, a potential arbitrage area is studied in connection with the calendar bandwidth construction.
Vitali, Sebastiano; Tichý, Tomáš; Kopa, Miloš
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10446/55224
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