Implied volatility surface: construction methodologies and ...
Implied volatility surface: construction methodologies and characteristics Cristian Homescu . [ ] 10 Jul 2011. This version: July 9, 2011 . The Implied volatility surface (IVS) is a fundamental building block in computational finance. We provide a survey of methodologies for constructing such surfaces. We also discuss various topics which influence the successful construction of IVS in practice: arbitrage-free conditions in both strike and time, how to perform extrapolation outside the core region, choice of calibrating functional and selection of numerical optimization algorithms, volatility surface dynamics and asymptotics. . Email address: . Original version: July 9, 2011. 1. Contents 1 Introduction 3. 2 volatility surfaces based on (local) stochastic volatility models 4. Heston model and its extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. SABR model and its extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Local stochastic volatility model.
2 Volatility surfaces based on (local) stochastic volatility models A widely used methodology employs formulae based from stochastic volatility models to fit the set of
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