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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.
1 Introduction The geometric Brownian motion dynamics used by Black and Scholes (1973) and Merton (1973) to price options constitutes a landmark in the development of modern quantitative finance.
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