Institute of Information Theory and Automation

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Conference Paper (Czech conference)

The arbitrage inconsistencies of implied volatility extraction in connection to calendar bandwidth

Vitali Sebastiano, Tichý Tomáš, Kopa Miloš

: Proceedings of 10th International Scientific Conference Financial management of firms and financial institutions Ostrava, p. 1405-1409

: International Scientific Conference Financial management of firms and financial institutions Ostrava 2015 /10./, (Ostrava, CZ, 07.09.2015-08.09.2015)

: GA13-25911S, GA ČR

: Option pricing, implied volatility, arbitrage opportunity, calendar bandwidth, bandwidth size

: http://library.utia.cas.cz/separaty/2019/E/vitali-0507127.pdf

(eng): 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.

: BB

: 10103

2019-01-07 08:39