No arbitrage SVI

DOI10.1137/20M1351060MaRDI QIDQ5065089zbMATH OpenOpenAlexFDO

Authors Claude Martini, Arianna Mingone

Publication date 18 March 2022

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/2005.03340

zbMATH Keywords

arbitrage-free parametrizationcalibrationimplied volatilitySVIvolatility smile

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: We fully characterize the absence of Butterfly arbitrage in the SVI formula for implied total variance proposed by Gatheral in 2004. The main ingredient is an intermediary characterization of the necessary condition for no arbitrage obtained for any model by Fukasawa in 2012 that the inverse functions of the -d1 and -d2 of the Black-Scholes formula, viewed as functions of the log-forward moneyness, should be increasing. A natural rescaling of the SVI parameters and a meticulous analysis of the Durrleman condition allow then to obtain simple range conditions on the parameters. This leads to a straightforward implementation of a least-squares calibration algorithm on the no arbitrage domain, which yields an excellent fit on the market data we used for our tests, with the guarantee to yield smiles with no Butterfly arbitrage.

Recommendations

• Arbitrage-free SVI volatility surfaces
• Arbitrage-free smoothing of the implied volatility surface
• Generalized arbitrage-free SVI volatility surfaces
• Robust calibration and arbitrage-free interpolation of SSVI slices
• No arbitrage global parametrization for the eSSVI volatility surface

Cites work

• A Black-Scholes inequality: applications and generalisations
• Analytically tractable stochastic stock price models.
• Arbitrage-free SVI volatility surfaces
• Fitting local volatility. Analytic and numerical approaches in Black-Scholes and local variance gamma models
• Generalized arbitrage-free SVI volatility surfaces
• Moment generating functions and normalized implied volatilities: unification and extension via Fukasawa's pricing formula
• Robust calibration and arbitrage-free interpolation of SSVI slices
• THE MOMENT FORMULA FOR IMPLIED VOLATILITY AT EXTREME STRIKES
• The normalizing transformation of the implied volatility smile

Cited in

(8)

• Generalized arbitrage-free SVI volatility surfaces
• Smiles in delta
• Simulation of Arbitrage-Free Implied Volatility Surfaces
• No arbitrage global parametrization for the eSSVI volatility surface
• The log‐moment formula for implied volatility
• No trade
• A general moment formula
• The implied volatility surface (also) is path-dependent

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