RT Journal Article
SR Electronic
T1 Improved Implementation of Local Volatility and Its Application to S&P 500 Index Options
JF The Journal of Derivatives
FD Institutional Investor Journals
SP 53
OP 64
DO 10.3905/jod.2010.17.3.053
VO 17
IS 3
A1 Greg Orosi
YR 2010
UL https://pm-research.com/content/17/3/53.abstract
AB We examine the empirical performance of a spline-based, local volatility surface for the period 2000–2005. Our findings indicate that the proposed model outperforms the best-performing implied volatility–based model reported in the current literature for European-style S&P 500 Index options. These results are achieved by a thin-plate spline-based representation and an alternate knot-placement method that has not been explored in previous work. Also, besides the spline-based representation, we find that no additional regularization is required. Although the primary objective of our study is the improved pricing of European-style options, our results have implications for pricing exotic options that employ Dupire's equation.TOPICS: Options, volatility measures