Original title: The Bandwidth Selection in Connection to Option Implied Volatility Extraction
Authors: Tichý, T. ; Kopa, Miloš ; Vitali, S.
Document type: Papers
Conference/Event: 12th International Conference Liberec Economic Forum 2015, Liberec (CZ), 2015-09-16 / 2015-09-17
Year: 2015
Language: eng
Abstract: Among various kinds of options we can found at the market, some are traded at organized exchanges and therefore are quite liquid, while others are traded only between particular parties. Whereas there is no need to look for a model to price liquid exchange traded options, since their price is generally accepted by the demand and supply, for illiquid or even exotic options new efficient models are still developed. The current market practice is to obtain the implied volatility of liquid options as based on Black-Scholes type (BS hereafter) models. The focus of this paper is to study the behavior of IV and SPD for several kernel functions and with respect to different choices of bandwidth parameter h. Specifically, we show several interesting implications of the change of h on the violation of no arbitrage condition and the total area of SPD under zero.
Keywords: arbitrage opportunity; implied volatility; state price density
Project no.: GA13-25911S (CEP)
Funding provider: GA ČR
Host item entry: Proceedings of the 12th International Conference Liberec Economic Forum 2015, ISBN 978-80-7494-225-9

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/2015/E/kopa-0452192.pdf
Original record: http://hdl.handle.net/11104/0253697

Permalink: http://www.nusl.cz/ntk/nusl-201269


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