Arbitrage-Free Implied Volatility Surfaces for Options on Single Stock Futures
Posted: 10 Jan 2013
Date Written: December 11, 2012
The current method employed by the Johannesburg Stock Exchange (JSE) to determine implied volatility is based on trade data and a linear deterministic approach. The aim of this paper is to construct a market-related arbitrage-free implied volatility surface, by using a quadratic deterministic function, for two stock indices and ten single stock futures (SSFs). Actual traded data is used and we show practically how all no-arbitrage conditions are implemented and tested.
Keywords: Volatility surface, options on single stock futures, quadratic deterministic function
JEL Classification: C61, G17
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