Free interpolation for the Zygmund class

We introduce interpolation sets for the Zygmund class 𝒵 {\mathcal{Z}} in the unit disc of the complex plane. This space lies between the Lipschitz classes of order α, 0 < α < 1 {0<\alpha<1} , and the class of order α = 1 {\alpha=1} , whose interpolation sets are given in a different way. We prove that the interpolation sets for 𝒵 {\mathcal{Z}} are interpolation sets for the Lipschitz classes of order α, 0 < α < 1 {0<\alpha<1} , and the latter are interpolation sets for a space slightly larger than 𝒵 {\mathcal{Z}} .

Arbitrage-free interpolation of call option prices

In this paper, we introduce a new interpolation method for call option prices and implied volatilities with respect to the strike, which first generates, for fixed maturity, an implied volatility curve that is smooth and free of static arbitrage. Our interpolation method is based on a distortion of the call price function of an arbitrage-free financial “reference” model of one’s choice. It reproduces the call prices of the reference model if the market data is compatible with the model. Given a set of call prices for different strikes and maturities, we can construct a call price surface by using this one-dimensional interpolation method on every input maturity and interpolating the generated curves in the maturity dimension. We obtain the algorithm of N. Kahalé [An arbitrage-free interpolation of volatilities, Risk 17 2004, 5, 102–106] as a special case, when applying the Black–Scholes model as reference model.

Model-Free Stochastic Collocation for an Arbitrage-Free Implied Volatility, Part II

This paper explores the stochastic collocation technique, applied on a monotonic spline, as an arbitrage-free and model-free interpolation of implied volatilities. We explore various spline formulations, including B-spline representations. We explain how to calibrate the different representations against market option prices, detail how to smooth out the market quotes, and choose a proper initial guess. The technique is then applied to concrete market options and the stability of the different approaches is analyzed. Finally, we consider a challenging example where convex spline interpolations lead to oscillations in the implied volatility and compare the spline collocation results with those obtained through arbitrage-free interpolation technique of Andreasen and Huge.