Web: http://arxiv.org/abs/2108.04941

Jan. 31, 2022, 2:11 a.m. | Brian Ning, Sebastian Jaimungal, Xiaorong Zhang, Maxime Bergeron

cs.LG updates on arXiv.org arxiv.org

We propose a hybrid method for generating arbitrage-free implied volatility
(IV) surfaces consistent with historical data by combining model-free
Variational Autoencoders (VAEs) with continuous time stochastic differential
equation (SDE) driven models. We focus on two classes of SDE models: regime
switching models and L\'evy additive processes. By projecting historical
surfaces onto the space of SDE model parameters, we obtain a distribution on
the parameter subspace faithful to the data on which we then train a VAE.
Arbitrage-free IV surfaces are …

arxiv

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