On Estimation of Volatility Surface and Prediction of Future Spot Volatility
A stochastic process v(t) is considered as a model for asset's spot volatility. A new approach is introduced for predicting future spot volatility and future volatility surface using a finite set of observed option prices. When the volatility parameter σ2 in the Black-Scholes formula[image omitted] is represented by the integrated volatility [image omitted] , then the local volatility surface can be estimated. The main idea is to linearize the expressions for implied volatility by using a result on Normal correlation. This linearization is obtained by introducing various ad hoc approximations.
Volume (Year): 13 (2006)
Issue (Month): 3 ()
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- Laurence K. Eisenberg & Robert A. Jarrow, 1991. "Option pricing with random volatilities in complete markets," Working Paper 91-16, Federal Reserve Bank of Atlanta.
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