An Adaptive Succesive Over-relaxation Method for Computing the Black-Scholes Implied Volatility
AbstractA new successive over-relaxation method to compute the Black-Scholes implied volatility is introduced. Properties of the new method are fully analyzed, including global well-definedness, local convergence, as well as global convergence. Quadratic order of convergence is achieved by either a dynamic relaxation or transformation of sequence technique. The method is further enhanced by introducing a rational approximation on initial values. Numerical implementation shows that uniformly in a very large domain, the new method converges to the true implied volatility with very few iterations. Overall, the new method achieves a very good combination of efficiency, accuracy and robustness.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 6867.
Date of creation: 21 Jan 2008
Date of revision:
Other versions of this item:
- Minqiang Li & Kyuseok Lee, 2011. "An adaptive successive over-relaxation method for computing the Black-Scholes implied volatility," Quantitative Finance, Taylor & Francis Journals, vol. 11(8), pages 1245-1269.
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-02-02 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
- Corrado, Charles J. & Miller, Thomas Jr., 1996. "A note on a simple, accurate formula to compute implied standard deviations," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 595-603, April.
- Chance, Don M, 1996. "A Generalized Simple Formula to Compute the Implied Volatility," The Financial Review, Eastern Finance Association, vol. 31(4), pages 859-67, November.
- Peter Carr & Liuren Wu, 2003.
"The Finite Moment Log Stable Process and Option Pricing,"
Journal of Finance,
American Finance Association, vol. 58(2), pages 753-778, 04.
- Peter Carr & Liuren Wu, 2002. "The Finite Moment Log Stable Process and Option Pricing," Finance 0207012, EconWPA.
- Chambers, Donald R & Nawalkha, Sanjay K, 2001. "An Improved Approach to Computing Implied Volatility," The Financial Review, Eastern Finance Association, vol. 36(3), pages 89-99, August.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.