Introducing the Implied Volatility Surface Parametrization (IVP): Application to the FX Market
14 Pages Posted: 6 Nov 2015 Last revised: 7 Nov 2015
Date Written: June 25, 2015
The aim of this article is to introduce a new parametrization of the implied volatility surface (IVP), which builds on the gSVI methodology recently introduced but incorporates novel features like a bid-ask model and the methodology behind de-arbitraging a volatility surface and stressing it without re-adding arbitrages within the scope of the FX market – where the relationship between currencies is constrained by the triangle rule as well as the usual calendar and butterfly arbitrages.
Keywords: IVP; SVI; gSVI; SABR; arbitrage-free volatility surface; positive semi-definite implied correlation matrices; FX; Dupire local volatility; constraint optimization; butterfly spread; calendar spread
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