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Maximum Implied Variance Slope -- Practical Aspects

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  • Fabien Le Floc'h
  • Winfried Koller

Abstract

In the Black-Scholes model, the absence of arbitrages imposes necessary constraints on the slope of the implied variance in terms of log-moneyness, asymptotically for large log-moneyness. The constraints are used for example in the SVI implied volatility parameterization to ensure the resulting smile has no arbitrages. This note shows that those no-arbitrage contraints are very mild, and that arbitrage is almost always guaranteed in a large range of slopes where the contraints are enforced.

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  • Fabien Le Floc'h & Winfried Koller, 2023. "Maximum Implied Variance Slope -- Practical Aspects," Papers 2304.13610, arXiv.org.
    • Handle: RePEc:arx:papers:2304.13610
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    File URL: http://arxiv.org/pdf/2304.13610
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