Implied volatility and state price density estimation: arbitrage analysis.

Result code in IS VaVaI
<a href="https://www.isvavai.cz/riv?ss=detail&h=RIV%2F61989100%3A27510%2F17%3A10236823" target="_blank" >RIV/61989100:27510/17:10236823 - isvavai.cz</a>
Alternative codes found
RIV/00216208:11320/17:10384550
Result on the web
<a href="http://dx.doi.org/10.1007/s10287-017-0283-8" target="_blank" >http://dx.doi.org/10.1007/s10287-017-0283-8</a>
DOI - Digital Object Identifier
<a href="http://dx.doi.org/10.1007/s10287-017-0283-8" target="_blank" >10.1007/s10287-017-0283-8</a>

Result language
angličtina
Original language name
Implied volatility and state price density estimation: arbitrage analysis.
Original language description
This paper deals with implied volatility (IV) estimation using no-arbitrage techniques. The current market practice is to obtain IV of liquid options as based on Black–Scholes (BS type hereafter) models. Such volatility is subsequently used to price illiquid or even exotic options. Therefore, it follows that the BS model can be related simultaneously to thewhole set of IVs as given by maturity/moneyness relation of tradable options. Then, it is possible to get IV curve or surface (a so called smile or smirk). Since the moneyness and maturity of IV often do not match the data of valuated options, some sort of estimating and local smoothing is necessary. However, it can lead to arbitrage opportunity if no-arbitrage conditions on state price density (SPD) are ignored. In this paper, using option data on DAX index, we aim to analyse the behavior of IV and SPD with respect to different choices of bandwidth parameter h, time to maturity and kernel function. A set of bandwidths which violates no-arbitrage conditions is identified.We document that the change of h implies interesting changes in the violation interval of moneyness. We also perform the analysis after removing outliers, in order to show that not only outliers cause the violation of no-arbitrage
Czech name
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Czech description
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Type
J<sub>imp</sub> - Article in a specialist periodical, which is included in the Web of Science database
CEP classification
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OECD FORD branch
50206 - Finance

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)

Publication year
2017
Confidentiality
S - Úplné a pravdivé údaje o projektu nepodléhají ochraně podle zvláštních právních předpisů

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