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Digital
Library of the European Council for Modelling and Simulation |
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Title: |
Volatility Surface Calibration In Illiquid Market
Environment |
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Authors: |
Laszlo Nagy, Mihaly Ormos |
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Published in:
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(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 |
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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 |
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DOI: |
https://doi.org/10.7148/2017-0148 |
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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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text: |
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