A New Arbitrage-Free Parametric Volatility Surface

20 Pages Posted: 20 Jun 2019 Last revised: 29 Feb 2020

Date Written: June 13, 2019

Abstract

This paper describes a new parametric volatility surface that is arbitrage free, extremely rich and flexible, and has closed-form expressions for both European option values and local volatilities. Our surface is based on the work of Carr and Pelts, for which we provide a simple derivation and a concrete implementation. We compare our new surface to the popular Stochastic-Volatility Inspired (SVI) surface and demonstrate the advantages of the new methodology.

Keywords: volatility, surface, arbitrage-free, Carr-Pelts, SVI, ensemble Carr-Pelts, options

Suggested Citation

Antonov, Alexandre and Konikov, Michael and Spector, Michael, A New Arbitrage-Free Parametric Volatility Surface (June 13, 2019). Available at SSRN: https://ssrn.com/abstract=3403708 or http://dx.doi.org/10.2139/ssrn.3403708

Alexandre Antonov

Abu Dhabi Investment Authority ( email )

211 Corniche Road
Abu Dhabi, Abu Dhabi PO Box3600
United Arab Emirates

ADIA ( email )

211 Corniche
abu Dhabi
United Arab Emirates

Michael Konikov (Contact Author)

Numerix ( email )

99 Park Avenue, 5th Floor
New York, NY 10016
United States

Michael Spector

Numerix ( email )

99 Park Avenue, 5th Floor
New York, NY 10016
United States

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