In this article, we show how to calibrate the widely-used SVI parameterization of the implied volatility smile in such a way as to guarantee the absence of static arbitrage. In particular, we exhibit a large class of arbitrage-free SVI volatility surfaces with a simple closed-form...

In this article, we will discuss a few enhancements for SABR model implementation, first we will introduce a fast SABR calibration with the standard Hagan's formula by reducing the number of model parameters; then we will address the negative probability at the low strike wing with the Hagan's...

Some generalizations of the Nelson and Siegel (1987) models are widely applied in central banks and financial institutions. This paper introduces a discrete-time version of the generalized Nelson-Siegel term structure models proposed by Svesson (1995) and Björk and Christensen (1999). As in...

For much of 2009 there was a static arbitrage in Euro CMS spread options, a consequence of the dislocation between the markets for options on CMS rates and CMS spreads. High volatility of volatility in the vanilla rates market pushed up the prices of long-dated CMS rate options, as these options...

Models in financial economics derived from no-arbitrage assumptions have found great favor among theoreticians and practitioners. We develop a model of option prices where arbitrage is short lived. The arbitrage process is Ornstein-Uhlenbeck with zero mean and rapid adjustment of deviations. We...

We develop a continuous-time model of liquidity provision, in which hedgers can trade multiple risky assets with arbitrageurs. Arbitrageurs have CRRA utility, while hedgers' asset demand is independent of wealth. An increase in hedgers' risk aversion can make arbitrageurs endogenously more...

The relationship between fundamental macroeconomic variables of the economy and stock markets is an essential one. It affects the perspective of monetary and fiscal policy decisions, portfolio management and economic development. It has been studied that macroeconomic variables can influence...

This paper investigates the pricing bounds of two one-touch options with the same maturity but different barrier levels, where the pricing bound is a range within which a one-touch option can take a price when a price of another one-touch option is given. The upper or lower bounds are the cost...

We introduce a multivariate diffusion model that is able to price derivative securities featuring multiple underlying assets. Each asset volatility smile is modeled according to a density-mixture dynamical model while the same property holds for the multivariate process of all assets, whose...