A New Arbitrage-Free Parametric Volatility Surface
20 Pages Posted: 20 Jun 2019
Date Written: June 13, 2019
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
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