Can the implied volatility surface move by parallel shifts?

DOI10.1007/S00780-008-0081-9MaRDI QIDQ2430258zbMATH OpenOpenAlexFDO

Authors L. C. G. Rogers, Michael R. Tehranchi

Publication date 6 April 2011

Published in Finance and Stochastics (Search for Journal in Brave)

Full work available at URL https://doi.org/10.1007/s00780-008-0081-9

zbMATH Keywords

Black-Scholes formulaimplied volatilitylong rateMills' ratiosmile asymptotic

Mathematics Subject Classification ID

Martingales with continuous parameter (60G44) Financial applications of other theories (91G80)

Review text

In this short note, the authors derive some model-independent properties of the implied volatility surface and use these properties to establish the conjecture of Steve Ross. Informally, the conjecture says that the implied volatility surface cannot move by parallel shifts. This result is interesting and important because it shows that blindly imposing dynamics on the implied volatility surface may lead to inconsistencies. This result is obtained under the fairly mild assumption that the price process is a continuous positive martingale.

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Cites work

• A GENERAL PROOF OF THE DYBVIG-INGERSOLL-ROSS THEOREM: LONG FORWARD RATES CAN NEVER FALL
• A market model for stochastic implied volatility
• Arbitrage-free market models for option prices: the multi-strike case
• Convergence of At-The-Money Implied Volatilities to the Spot Volatility
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• REGULAR VARIATION AND SMILE ASYMPTOTICS
• THE MOMENT FORMULA FOR IMPLIED VOLATILITY AT EXTREME STRIKES
• The pricing of options and corporate liabilities

Cited in

(24)

• Black-Scholes in a CEV random environment
• Parametric modeling of implied smile functions: a generalized SVI model
• The large-maturity smile for the Stein-Stein model
• Generalized arbitrage-free SVI volatility surfaces
• Arbitrage-free SVI volatility surfaces
• Asymptotic formulae for implied volatility in the Heston model
• Moment generating functions and normalized implied volatilities: unification and extension via Fukasawa's pricing formula
• Shapes of implied volatility with positive mass at zero
• The survival probability of the SABR model: asymptotics and application
• Social discounting and the long rate of interest
• Implied volatility in strict local martingale models
• Generalization of the Dybvig-Ingersoll-Ross theorem and asymptotic minimality
• The small and large time implied volatilities in the minimal market model
• Asymptotics for exponential Lévy processes and their volatility smile: survey and new results
• The normalizing transformation of the implied volatility smile
• On the harmonic mean representation of the implied volatility
• Scenario analysis for derivative portfolios via dynamic factor models
• Asymptotics of the time-discretized log-normal SABR model: the implied volatility surface
• Anomalous diffusions in option prices: connecting trade duration and the volatility term structure
• MODEL-FREE IMPLIED VOLATILITY: FROM SURFACE TO INDEX
• Short maturity forward start Asian options in local volatility models
• Simulation of Arbitrage-Free Implied Volatility Surfaces
• A general moment formula
• Explicit option pricing with additive processes

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