June 15th, 2011

A New Simple Approach for Constructing Implied Volatility Surfaces with Peter Carr

A Joint Finance and Networking Event with Alumni from the Courant Institute (NYU) and MIT, June 15, 2011

The NYU Kimmel Center, Room 802
60 Washington Square South, New York
New York, NY 10012

Please join us for our next joint Courant/MITĀ  eventĀ  with Peter Carr, IAFE/Sungard Financial Engineer of the Year, and Managing Director, Morgan Stanley. Refreshments will be served.

Standard option pricing models specify the dynamics of the security price and the instantaneous variance rate, and derives its no-arbitrage implication for the option implied volatility surface. Market models start with an initial implied volatility surface and a diffusion specification for the implied volatility dynamics, and derive the no-arbitrage constraints on the risk-neutral drift of the dynamics. This paper proposes a new approach, which specifies the security price and the implied volatility dynamics while leaving the instantaneous variance rate dynamics unspecified. The allowable shape for the initial implied volatility surface is then derived based on dynamic no-arbitrage arguments. Two parametric specifications for the implied volatility dynamics lead to extreme tractability, as the whole implied volatility surface is determined by a quadratic equation. The paper also proposes a dynamic calibration methodology and calibrates the two models to over-the-counter currency option and equity index option implied volatility surfaces over an 11-year period. The model with lognormal implied variance dynamics generates superior performance over standard option pricing models of similar complexities. Furthermore, constructing implied volatility surfaces using our two models is 100 times faster than using traditional option pricing models.

Time: 6:00 to 8:30pm - doors open at 6pm, talk begins at 7pm

Registration: Registration is needed for the event - number of seats are limited . Click on "Registration" on the left side menu to register. (Fee: $15 for Alumni/Fellow/Student of the Mathematics in Finance MS program, Courant Institute; and $30 Other)

Must present valid photo ID at entrance. Please tell security you are attending the "Courant/MIT Finance Event"