PT  - JOURNAL ARTICLE
AU  - László Nagy
AU  - Mihály Ormos
TI  - Volatility Surface Calibration to Illiquid Options
AID  - 10.3905/jod.2019.26.3.087
DP  - 2019 Feb 28
TA  - The Journal of Derivatives
PG  - 87--96
VI  - 26
IP  - 3
4099  - https://pm-research.com/content/26/3/87.short
4100  - https://pm-research.com/content/26/3/87.full
AB  - This article shows the fragility of the widely-used Stochastic Volatility Inspired (SVI) methodology in option pricing. The results highlight the sensitivity of SVI to the fitting penalty function. The authors compare different weight functions and propose to use the implied vega weights. They then unveil the relationship between vega weights and the minimization task of observed and fitted price differences, and show that implied vega weights can stabilize the SVI fit to illiquid options.TOPICS: Options, statistical methods, performance measurement