The bandwidth selection in connection to option implied volatility extraction

Result code in IS VaVaI

<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F61989100%3A27510%2F15%3A86094768" target="_blank" >RIV/61989100:27510/15:86094768 - isvavai.cz</a>

Alternative codes found

RIV/67985556:_____/15:00452192

Result on the web

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DOI - Digital Object Identifier

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Result language

angličtina

Original language name

The bandwidth selection in connection to option implied volatility extraction

Original language description

Among various kinds of options we can found at the market, some are traded at organized exchanges and therefore are quite liquid, while others are traded only between particular parties. Whereas there is no need to look for a model to price liquid exchange traded options, since their price is generally accepted by the demand and supply, for illiquid or even exotic options new efficient models are still developed. The current market practice is to obtain the implied volatility of liquid options as based on Black-Scholes type (BS hereafter) models. Since the BS model at one time moment can be related to a large set of IVs as given by different parameters (maturity/moneyness relation) of tradable options leading to IV curve or surface. Since there is no continuum of options with various parameters, the curve / surface must be obtained by suitable smoothing and interpolation. However, it can bring an arbitrage opportunity, if no-arbitrage conditions on state price density (SPD) are ignored. The focus of this paper is to study the behavior of IV and SPD for several kernel functions and with respect to different choices of bandwidth parameter h. Specifically, we show several interesting implications of the change of h on the violation of no arbitrage condition and the total area of SPD under zero.

Czech name

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Czech description

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Type

D - Article in proceedings

CEP classification

BB - Applied statistics, operational research

OECD FORD branch

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Project

Result was created during the realization of more than one project. More information in the Projects tab.

Continuities

P - Projekt vyzkumu a vyvoje financovany z verejnych zdroju (s odkazem do CEP)<br>S - Specificky vyzkum na vysokych skolach

Publication year

2015

Confidentiality

S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

Article name in the collection

Liberec Economic Forum 2015 : proceedings of the 12th international conference : 16th - 17th September 2015, Liberec, Czech Republic, EU

ISBN

978-80-7494-225-9

ISSN

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e-ISSN

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Number of pages

8

Pages from-to

201-208

Publisher name

Technical University of Liberec

Place of publication

Liberec

Event location

Liberec

Event date

Sep 16, 2015

Type of event by nationality

EUR - Evropská akce

UT code for WoS article

000365053000020