On The Relationship Between The Call Price Surface And The Implied Volatility Surface Close To Expiry
We examine the asymptotic behaviour of the call price surface and the associated Black-Scholes implied volatility surface in the small time to expiry limit under the condition of no arbitrage. In the final section, we examine a related question of existence of a market model with non-convergent implied volatility. We show that there exist arbitrage free markets in which implied volatility may fail to converge to any value, finite or infinite.
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Volume (Year): 12 (2009)
Issue (Month): 04 ()
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- 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.
- Brace, Alan & Fabbri, Giorgio & Goldys, Benjamin, 2007.
"An Hilbert space approach for a class of arbitrage free implied volatilities models,"
6321, University Library of Munich, Germany.
- A. Brace & G. Fabbri & B. Goldys, 2007. "An Hilbert space approach for a class of arbitrage free implied volatilities models," Papers 0712.1343, arXiv.org, revised Dec 2007.
- Rama Cont & Jose da Fonseca, 2002. "Dynamics of implied volatility surfaces," Quantitative Finance, Taylor & Francis Journals, vol. 2(1), pages 45-60.
- 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.
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