Introducing the Implied Volatility Surface Parametrization (IVP): Application to the FX Market

14 Pages Posted: 6 Nov 2015 Last revised: 7 Nov 2015

See all articles by Babak Mahdavi-Damghani

Babak Mahdavi-Damghani

University of Oxford - Oxford-Man Institute of Quantitative Finance

Date Written: June 25, 2015

Abstract

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

Suggested Citation

Mahdavi-Damghani, Babak, Introducing the Implied Volatility Surface Parametrization (IVP): Application to the FX Market (June 25, 2015). Available at SSRN: https://ssrn.com/abstract=2686138 or http://dx.doi.org/10.2139/ssrn.2686138

Babak Mahdavi-Damghani (Contact Author)

University of Oxford - Oxford-Man Institute of Quantitative Finance ( email )

United Kingdom

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