Implied Volatility and Forward Price Term Structures

Advance Working Paper Series ISEG, n. 3/2009

15 Pages Posted: 24 Mar 2014

See all articles by Raquel M. Gaspar

Raquel M. Gaspar

ISEG and Cemapre/REM, Universidade de Lisboa

Date Written: 2009

Abstract

This paper discusses the relation between forward price models (FPM) and the so called implied volatility term structure (VTS). We start by considering the case of pure deterministic forward price volatilities and suppose both forward contracts and at-the-money (ATM) options, on a same underlying, are liquidly traded in the market. We, then, derive no arbitrage conditions between the functional form of the ATM implied VTS and the functional form of forward price volatilities. We conclude the first part by characterizing a parametric family of ATM implied VTS that is compatible with a finite dimensional realization (FDR) of forward prices. Finally, we consider the possibility of stochastic forward price volatilities and derive a no arbitrage drift condition that must hold for the dynamics of ATM implied VTS.

Keywords: Implied volatility, forward prices, term structures, finite realizations

JEL Classification: C02, C65, E43, G12

Suggested Citation

Gaspar, Raquel M., Implied Volatility and Forward Price Term Structures (2009). Advance Working Paper Series ISEG, n. 3/2009, Available at SSRN: https://ssrn.com/abstract=2297524 or http://dx.doi.org/10.2139/ssrn.2297524

Raquel M. Gaspar (Contact Author)

ISEG and Cemapre/REM, Universidade de Lisboa ( email )

Rua Miguel Lupi, 20
room 510
Lisbon, 1249-078
Portugal

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
109
Abstract Views
793
Rank
450,735
PlumX Metrics