Robust Calculation of Model-Free Implied Volatility from Calibrated Surfaces
University of St. Gallen
Philipp B. Rindler
EBS Universität für Wirtschaft und Recht - EBS Business School
Feb 1, 2012
This paper proposes a new method to calculate model-free implied volatility from a calibrated option price surface. This circumvents common interpolation/extrapolation problems found in established methodologies, where prices enter calculation directly, and is numerically more stable. Areas outside the observable strikes are approximated better. Predictive regressions over 180 months based on this new method show that the new method is indeed superior in most cases, even with only very few observable strikes.
Number of Pages in PDF File: 20
Keywords: Option pricing, model-free implied volatility, characteristic functions
JEL Classification: C61, C80, G13working papers series
Date posted: April 22, 2012
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