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Arbitrage-free conditions for implied volatility surface by Delta
Wang, Ximei1,2; Zhao, Yanlong1,2; Bao, Ying3
2019-04-01
Source PublicationNORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE
ISSN1062-9408
Volume48Pages:819-834
AbstractImplied volatility surface provided by Deltas and maturities (IVS-DM) is widely used in financial fields, especially in foreign exchange options market, since it can effectively describe the characteristics of the volatilities. The main purpose of this paper is to develop arbitrage-free conditions for the IVS-DM. We propose sufficient conditions for the IVS-DM to be static arbitrage-free, which are proved to be necessary under a mild assumption. To test the arbitrage opportunities in the market data, we build a practical tool, which is more accurate than existing ones such as early warning indicator tests. For illustration, arbitrage tests are conducted on a simulated IVS-DM to show the effectiveness of the conditions. The results are consistent with the tests for the implied volatility surface provided by strikes and maturities. Furthermore, empirical examinations are implemented on EURUSD and USDJPY currency options to ensure the feasibility of the proposed conditions.
KeywordImplied volatility surface Foreign exchange market Arbitrage-free condition Deltas
DOI10.1016/j.najef.2018.08.011
Language英语
Funding ProjectNational Key Research and Development Program of China[2016YFB0901902] ; National Natural Science Foundation of China[61622309] ; National Key Basic Research Program of China (973 Program)[2014CB845301]
WOS Research AreaBusiness & Economics
WOS SubjectBusiness, Finance ; Economics
WOS IDWOS:000465646200052
PublisherELSEVIER SCIENCE INC
Citation statistics
Document Type期刊论文
Identifierhttp://ir.amss.ac.cn/handle/2S8OKBNM/34615
Collection系统科学研究所
Corresponding AuthorZhao, Yanlong
Affiliation1.Chinese Acad Sci, Acad Math & Syst Sci, LSC, Beijing 100190, Peoples R China
2.Univ Chinese Acad Sci, Sch Math Sci, Beijing 100049, Peoples R China
3.Ind & Commercial Bank China, Risk Management Dept, Beijing 100033, Peoples R China
Recommended Citation
GB/T 7714
Wang, Ximei,Zhao, Yanlong,Bao, Ying. Arbitrage-free conditions for implied volatility surface by Delta[J]. NORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE,2019,48:819-834.
APA Wang, Ximei,Zhao, Yanlong,&Bao, Ying.(2019).Arbitrage-free conditions for implied volatility surface by Delta.NORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE,48,819-834.
MLA Wang, Ximei,et al."Arbitrage-free conditions for implied volatility surface by Delta".NORTH AMERICAN JOURNAL OF ECONOMICS AND FINANCE 48(2019):819-834.
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