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Arbitrage-Free Multi-Maturity Risk-Neutral Marginals

Author

Listed:
  • Hao Qin
  • Ruozhong Yang
  • Charlie Che
  • Liming Feng

Abstract

Many quantitative finance methods and applications are formulated in terms of option-implied risk-neutral marginals rather than directly in terms of option prices. Representative examples include martingale optimal transport, Bass local-volatility calibration, scenario analysis, and option-implied tail-risk measurement. The desired risk-neutral marginals should define a genuine probability law on the entire support, reproduce the input arbitrage-free option prices exactly, be free of butterfly and calendar arbitrage, and admit efficient evaluation of the density, distribution function, and quantiles, as well as Monte Carlo sampling. Existing methods typically optimize only a subset of these properties, depending on their intended purpose. This leaves a gap between upstream arbitrage-free option prices and the readily usable risk-neutral marginals required by downstream applications. We propose an explicit construction of risk-neutral marginals from discrete arbitrage-free option prices. On the observed strike range, probability mass is assigned interval by interval to exactly reproduce the input option prices. Outside the observed range, closed-form power-law tails complete the distribution by satisfying price and slope boundary conditions and allocating the remaining probability mass. Butterfly- and calendar-arbitrage-freeness are guaranteed by construction. The construction is feasible by design and computationally efficient. The resulting marginal laws admit closed-form densities, distribution functions, quantiles, and efficient Monte Carlo sampling. Numerical experiments on synthetic SSVI data and S\&P~500 market data demonstrate that the proposed construction efficiently and robustly produces marginals satisfying all of these properties in practice.

Suggested Citation

  • Hao Qin & Ruozhong Yang & Charlie Che & Liming Feng, 2026. "Arbitrage-Free Multi-Maturity Risk-Neutral Marginals," Papers 2607.06204, arXiv.org.
    • Handle: RePEc:arx:papers:2607.06204
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    References listed on IDEAS

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