Original title: The arbitrage inconsistencies of implied volatility extraction in connection to calendar bandwidth
Authors: Vitali, Sebastiano ; Tichý, Tomáš ; Kopa, Miloš
Document type: Papers
Conference/Event: International Scientific Conference Financial management of firms and financial institutions Ostrava 2015 /10./, Ostrava (CZ), 2015-09-07 / 2015-09-08
Year: 2015
Language: eng
Abstract: Options are often priced by Black and Scholes model by using artificial (and unobserved) volatility implied by option market prices. Since many options do not have their traded counterparts with the same maturity and moneyness, it is often needed to interpolate the volatility values. The general procedure of implied volatility extraction from market prices and subsequent smoothing can, however, lead to inconsistent values or even arbitrage opportunities. In this paper, a potential arbitrage area is studied in connection with the calendar bandwidth construction.
Keywords: arbitrage opportunity; bandwidth size; calendar bandwidth; implied volatility; Option pricing
Project no.: GA13-25911S (CEP)
Funding provider: GA ČR
Host item entry: Proceedings of 10th International Scientific Conference Financial management of firms and financial institutions Ostrava, ISBN 978-80-248-3865-6

Institution: Institute of Information Theory and Automation AS ČR (web)
Document availability information: Fulltext is available at external website.
External URL: http://library.utia.cas.cz/separaty/2019/E/vitali-0507127.pdf
Original record: http://hdl.handle.net/11104/0298534

Permalink: http://www.nusl.cz/ntk/nusl-399060


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