On the implied volatility layers under the future risk-free rate uncertainty
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 and...
| Main Authors: | , |
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| Format: | Journal Article |
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INDERSCIENCE PUBLISHERS
2014
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| Online Access: | http://hdl.handle.net/20.500.11937/22516 |
| _version_ | 1848750891571609600 |
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| author | Hin, L. Dokuchaev, Nikolai |
| author_facet | Hin, L. Dokuchaev, Nikolai |
| author_sort | Hin, L. |
| building | Curtin Institutional Repository |
| collection | Online Access |
| description | 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 and the risk free rate are calculated jointly from the observed option prices. Due to the cumulative risk-free rate uncertainty, the corresponding system of equations is underdetermined, leading to uncertainty in the volatility surface. We estimate the size of implied volatility layers between the surfaces representing the upper and lower bounds for the implied volatilities for the future risk-free rate uncertainty, defined by current Libor rate and the size of fluctuation estimated from the historical data. |
| first_indexed | 2025-11-14T07:44:02Z |
| format | Journal Article |
| id | curtin-20.500.11937-22516 |
| institution | Curtin University Malaysia |
| institution_category | Local University |
| last_indexed | 2025-11-14T07:44:02Z |
| publishDate | 2014 |
| publisher | INDERSCIENCE PUBLISHERS |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | curtin-20.500.11937-225162017-09-13T13:55:06Z On the implied volatility layers under the future risk-free rate uncertainty Hin, L. Dokuchaev, Nikolai interest rate term structure implied volatility layers implied volatility surfaces model uncertainty 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 and the risk free rate are calculated jointly from the observed option prices. Due to the cumulative risk-free rate uncertainty, the corresponding system of equations is underdetermined, leading to uncertainty in the volatility surface. We estimate the size of implied volatility layers between the surfaces representing the upper and lower bounds for the implied volatilities for the future risk-free rate uncertainty, defined by current Libor rate and the size of fluctuation estimated from the historical data. 2014 Journal Article http://hdl.handle.net/20.500.11937/22516 10.2139/ssrn.2287658 INDERSCIENCE PUBLISHERS fulltext |
| spellingShingle | interest rate term structure implied volatility layers implied volatility surfaces model uncertainty Hin, L. Dokuchaev, Nikolai On the implied volatility layers under the future risk-free rate uncertainty |
| title | On the implied volatility layers under the future risk-free rate uncertainty |
| title_full | On the implied volatility layers under the future risk-free rate uncertainty |
| title_fullStr | On the implied volatility layers under the future risk-free rate uncertainty |
| title_full_unstemmed | On the implied volatility layers under the future risk-free rate uncertainty |
| title_short | On the implied volatility layers under the future risk-free rate uncertainty |
| title_sort | on the implied volatility layers under the future risk-free rate uncertainty |
| topic | interest rate term structure implied volatility layers implied volatility surfaces model uncertainty |
| url | http://hdl.handle.net/20.500.11937/22516 |