ON THE RELATIONSHIP BETWEEN THE CALL PRICE SURFACE AND THE IMPLIED VOLATILITY SURFACE CLOSE TO EXPIRY

We examine the asymptotic behaviour of the call price surface and the associated Black-Scholes implied volatility surface in the small time to expiry limit under the condition of no arbitrage. In the final section, we examine a related question of existence of a market model with non-convergent implied volatility. We show that there exist arbitrage free markets in which implied volatility may fail to converge to any value, finite or infinite.

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Year of publication:	2009
Authors:	ROPER, MICHAEL ; RUTKOWSKI, MAREK
Published in:	International Journal of Theoretical and Applied Finance (IJTAF). - World Scientific Publishing Co. Pte. Ltd., ISSN 1793-6322. - Vol. 12.2009, 04, p. 427-441
Publisher:	World Scientific Publishing Co. Pte. Ltd.
Subject:	Option pricing \| implied volatility \| logarithmic limit \| Black-Scholes formula \| asymptotic and approximate formulae

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Extent:	application/pdf text/html
Type of publication:	Article
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10004983229