Arbitrage-free SVI volatility surfaces
In this article, we show how to calibrate the widely-used SVI parameterization of the implied volatility surface in such a way as to guarantee the absence of static arbitrage. In particular, we exhibit a large class of arbitrage-free SVI volatility surfaces with a simple closed-form representation. We demonstrate the high quality of typical SVI fits with a numerical example using recent SPX options data.
References listed on IDEAS
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- Clark, Peter K, 1973. "A Subordinated Stochastic Process Model with Finite Variance for Speculative Prices," Econometrica, Econometric Society, vol. 41(1), pages 135-155, January.
- Matthias Fengler, 2009.
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Taylor & Francis Journals, vol. 9(4), pages 417-428.
- Matthias R. Fengler, 2005. "Arbitrage-Free Smoothing of the Implied Volatility Surface," SFB 649 Discussion Papers SFB649DP2005-019, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Harrison, J. Michael & Kreps, David M., 1979. "Martingales and arbitrage in multiperiod securities markets," Journal of Economic Theory, Elsevier, vol. 20(3), pages 381-408, June.
- Jim Gatheral & Antoine Jacquier, 2011. "Convergence of Heston to SVI," Quantitative Finance, Taylor & Francis Journals, vol. 11(8), pages 1129-1132.
- Cousot, Laurent, 2007. "Conditions on option prices for absence of arbitrage and exact calibration," Journal of Banking & Finance, Elsevier, vol. 31(11), pages 3377-3397, November. Full references (including those not matched with items on IDEAS)
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