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Implied Volatility Surface: Construction Methodologies and Characteristics

  • Cristian Homescu
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    The implied volatility surface (IVS) is a fundamental building block in computational finance. We provide a survey of methodologies for constructing such surfaces. We also discuss various topics which can influence the successful construction of IVS in practice: arbitrage-free conditions in both strike and time, how to perform extrapolation outside the core region, choice of calibrating functional and selection of numerical optimization algorithms, volatility surface dynamics and asymptotics.

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    File URL: http://arxiv.org/pdf/1107.1834
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    Paper provided by arXiv.org in its series Papers with number 1107.1834.

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    Date of creation: Jul 2011
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    Handle: RePEc:arx:papers:1107.1834
    Contact details of provider: Web page: http://arxiv.org/

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