Transcription of Implied volatility surface: construction methodologies and ...
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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. Heston model and its extensions .. 4. SABR model and its extensions .. 6. Local stochastic volatility model .. 9. 3 volatility surfaces based on Levy processes 10. Implied Levy volatility .. 11. 4 volatility surface based on models for the dynamics of Implied volatility 12.
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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