Model-free stochastic collocation for an arbitrage-free implied volatility

Title

Model-free stochastic collocation for an arbitrage-free implied volatility: Part I

 Author

Le Floch, F.L.Y. (TU Delft Numerical Analysis)
Oosterlee, C.W. (TU Delft Numerical Analysis; Centrum Wiskunde & Informatica (CWI)) ORCID 0000-0002-7322-4094

 Date

2019-12-01

 Abstract

This paper explains how to calibrate a stochastic collocation polynomial against market option prices directly. The method is first applied to the interpolation of short-maturity equity option prices in a fully arbitrage-free manner and then to the joint calibration of the constant maturity swap convexity adjustments with the interest rate swaptions smile. To conclude, we explore some limitations of the stochastic collocation technique.


 Subject

Arbitrage-free
Implied volatility
Quantitative finance
Risk-neutral density
Stochastic collocation

 To reference this document use:

http://resolver.tudelft.nl/uuid:a3d18703-36a2-43d5-9d98-cd60eb00051b

 DOI

https://doi.org/10.1007/s10203-019-00238-x

 ISSN

1593-8883

 Source

Decisions in Economics and Finance: a journal of applied mathematics, 42 (2), 679-714

 Part of collection

Institutional Repository

 Document type

journal article

 Rights

© 2019 F.L.Y. Le Floch, C.W. Oosterlee
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