Abstract

http://ssrn.com/abstract=1627645
 
 

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Smiling at Evolution


Daniel Alexandre Bloch


Université Paris VI Pierre et Marie Curie

Carlos Artemio Coello Coello


Centro de Investigación y de Estudios Avanzados del IPN (CINVESTAV-IPN)

May 21, 2010


Abstract:     
We generate a reliable implied volatility surface without arbitrage in space and in time by parametrising a mixture of shifted lognormal densities under constraints and use a Differential Evolution algorithm to calibrate the model's parameters to a finite set of option prices. It is used for marking options not directly visible as well as for computing a proper deterministic local volatility. To do so, we devise an evolutionary algorithm handling constraints in a simple and efficient way. Using some of the improvements made to the DE algorithm and taking advantage of the specific structure of our objective function, we use special operators to help satisfy the equality constraints together with feasibility rules to handle the inequality constraints. Finally, we propose a modified algorithm for solving our optimisation problem under constraints which, after testing on real market data, greatly improves its performances.

Number of Pages in PDF File: 24

Keywords: No Arbitrage Volatility Surface in Time and Space, Differential Evolution under Constraints, Special Operators

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Date posted: June 20, 2010  

Suggested Citation

Bloch, Daniel Alexandre and Coello Coello, Carlos Artemio, Smiling at Evolution (May 21, 2010). Available at SSRN: http://ssrn.com/abstract=1627645 or http://dx.doi.org/10.2139/ssrn.1627645

Contact Information

Daniel Alexandre Bloch (Contact Author)
University of Paris 6 Pierre et Marie Curie ( email )
175 Rue du Chevaleret
Paris, 75013
France
Carlos Artemio Coello Coello
Centro de Investigación y de Estudios Avanzados del IPN (CINVESTAV-IPN) ( email )
07360 Mexico, D.F.
Mexico
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