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Digital Library

of the European Council for Modelling and Simulation

 

Title:

Volatility Surface Calibration In Illiquid Market Environment

Authors:

Laszlo Nagy, Mihaly Ormos

Published in:

 

 

 

(2017).ECMS 2017 Proceedings Edited by: Zita Zoltay Paprika, Péter Horák, Kata Váradi, Péter Tamás Zwierczyk, Ágnes Vidovics-Dancs, János Péter Rádics

European Council for Modeling and Simulation. doi:10.7148/2017

 

 

ISBN: 978-0-9932440-4-9/

ISBN: 978-0-9932440-5-6 (CD)

 

 

31st European Conference on Modelling and Simulation,

Budapest, Hungary, May 23rd – May 26th, 2017

 

Citation format:

Laszlo Nagy, Mihaly Ormos (2017). Volatility Surface Calibration In Illiquid Market Environment, ECMS 2017 Proceedings Edited by: Zita Zoltay Paprika, Péter Horák, Kata Váradi, Péter Tamás Zwierczyk, Ágnes Vidovics-Dancs, János Péter Rádics European Council for Modeling and Simulation. doi: 10.7148/2017-0148

DOI:

https://doi.org/10.7148/2017-0148

Abstract:

In this paper, we show the fragility of widely-used Stochastic Volatility Inspired (SVI) methodology. Especially, we highlight the sensitivity of SVI to the fitting penalty function. We compare different weight functions and propose to use a novel methodology, the implied vega weights. Moreover, we unveil the relationship between vega weights and the minimization task of observed and fitted price differences. Besides, we show that implied vega weights can stabilize SVI surfaces in illiquid market conditions.

 

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