Model-free stochastic collocation for an arbitrage-free implied volatility: Part I

Fabien Le Floc’h; Cornelis W. Oosterlee

doi:10.1007/s10203-019-00238-x

Model-free stochastic collocation for an arbitrage-free implied volatility: Part I

Fabien Le Floc’h^*
, Cornelis W. Oosterlee

^*Corresponding author for this work

extern

Research output: Contribution to journal › Article › Academic › peer-review

Abstract

This paper explains how to calibrate a stochastic collocation polynomial against market option prices directly. The method is first applied to the interpolation of short-maturity equity option prices in a fully arbitrage-free manner and then to the joint calibration of the constant maturity swap convexity adjustments with the interest rate swaptions smile. To conclude, we explore some limitations of the stochastic collocation technique.

Original language	English
Pages (from-to)	679-714
Number of pages	36
Journal	Decisions in Economics and Finance
Volume	42
Issue number	2
DOIs	https://doi.org/10.1007/s10203-019-00238-x
Publication status	Published - 1 Dec 2019
Externally published	Yes

Bibliographical note

Publisher Copyright:
© 2019, The Author(s).

Keywords

Arbitrage-free
Implied volatility
Quantitative finance
Risk-neutral density
Stochastic collocation

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10.1007/s10203-019-00238-x

Cite this

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KW - Risk-neutral density

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Model-free stochastic collocation for an arbitrage-free implied volatility: Part I

Abstract

Bibliographical note

Keywords

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