We suggest a semi-nonparametric estimator for the entire call price surface based on a tensor-product B-spline. To enforce no-arbitrage constraints in strike and calendar dimensions we establish sufficient no-arbitrage conditions on the control net of the tensor product (TP) B-spline. Since...

We suggest a simple and general approach to fitting the discount curve under no-arbitrage constraints based on a penalized shape-constrained B-spline. Our approach accommodates B-splines of any order and fitting both under the L-1 and the L-2 loss functions. Simulations and an empirical analysis...

The paper studies estimation of implied volatility and the impact of the choice of the corresponding risk-free rate proxy. We suggest to analyze the implied volatility and the risk-free rate proxy inferred in conjunction from the observed option prices. We formulate and solve an overdefined...

This paper suggests a method of estimation of the implied volatility smile uncertainty of the observed options prices due to future risk-free rate uncertainty. The purpose is to quantify the range of uncertainty under different scenarios.We consider the setting where both the implied volatility...

We propose a strategy to extract the information on the market participants' expectation of the future short rate from the cross-sectional zero coupon bond prices. In line with the current market practice of building different yield curves for different tenors, we construct multiple one-factor...

The pricing accuracy and pricing performance of local volatility models crucially depends on absence of arbitrage in the implied volatility surface: an input implied volatility surface that is not arbitrage-free invariably results in negative transition probabilities and/ or negative local...

We investigate the relationship between inflation and price variation using highly disaggregated, weekly price data for consumption goods recorded in Germany during 1995, a low inflation period. We find a significant positive correlation between the rates of price change and price dispersion,...

It is common practice to identify the number and sources of shocks that move implied volatilities across space and time by applying Principal Components Analysis (PCA) to pooled covariance matrices of changes in implied volatilities. This approach, however, is likely to result in a loss of...

The analysis of volatility in financial markets has become a first rank issue in modern financial theory and practice: Whether in risk management, portfolio hedging, or option pricing, we need to have a precise notion of the market's expectation of volatility. Much research has been done on the...

Multivariate Volatility Models belong to the class of nonlinear models for financial data. Here we want to focus on multivariate GARCH models. These models assume that the variance of the innovation distribution follows a time dependent process conditional on information which is generated by...