Abstract

http://ssrn.com/abstract=1882567
 
 

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Implied Volatility Surface: Construction Methodologies and Characteristics


Cristian Homescu


Independent

July 9, 2011


Abstract:     
The implied volatility surface (IVS) is a fundamental building block in computational finance. We provide a survey of methodologies for constructing such surfaces. We also discuss various topics which can influence the successful construction of IVS in practice: arbitrage-free conditions in both strike and time, how to perform extrapolation outside the core region, choice of calibrating functional and selection of numerical optimization algorithms, volatility surface dynamics and asymptotics.

Number of Pages in PDF File: 38

Keywords: volatility surface, dynamics of implied volatility, stochastic volatility models, local stochastic volatility models, calibration, numerical methods, optimization, computational efficiency

JEL Classification: C15, C61, C63, G12, G13

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Date posted: July 10, 2011  

Suggested Citation

Homescu, Cristian, Implied Volatility Surface: Construction Methodologies and Characteristics (July 9, 2011). Available at SSRN: http://ssrn.com/abstract=1882567 or http://dx.doi.org/10.2139/ssrn.1882567

Contact Information

Cristian Homescu (Contact Author)
Independent ( email )
No Address Available
United States
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