{"title":"ARM: The Analytic Recovery Method","authors":"E. Linden","doi":"10.3905/jod.2023.1.178","DOIUrl":null,"url":null,"abstract":"The analytic recovery method (ARM) recovers arbitrage-free density functions from a given set of option prices with maximum accuracy and speed. For arbitrage-free option prices, ARM provides extremely fast convergence and arbitrary accuracy. In the presence of noise, the closest arbitrage-free approximation is identified. Option prices and densities, as well as their moments and other parameters, are easy-to-handle analytic functions defined for arbitrary strike prices. ARM reveals inconsistencies between quoted option prices, particularly for longer durations. ARM is essentially based on the no-arbitrage assumptions; it is not related to a specific model. It has been tested for a selection of S&P 500, EuroStoxx 50, and DAX data. Excellent no-arbitrage fit to call and put prices is obtained; extrapolations are in line with the market.","PeriodicalId":34223,"journal":{"name":"Jurnal Derivat","volume":"30 1","pages":"8 - 27"},"PeriodicalIF":0.0000,"publicationDate":"2023-02-28","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Jurnal Derivat","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.3905/jod.2023.1.178","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"","JCRName":"","Score":null,"Total":0}
引用次数: 0
Abstract
The analytic recovery method (ARM) recovers arbitrage-free density functions from a given set of option prices with maximum accuracy and speed. For arbitrage-free option prices, ARM provides extremely fast convergence and arbitrary accuracy. In the presence of noise, the closest arbitrage-free approximation is identified. Option prices and densities, as well as their moments and other parameters, are easy-to-handle analytic functions defined for arbitrary strike prices. ARM reveals inconsistencies between quoted option prices, particularly for longer durations. ARM is essentially based on the no-arbitrage assumptions; it is not related to a specific model. It has been tested for a selection of S&P 500, EuroStoxx 50, and DAX data. Excellent no-arbitrage fit to call and put prices is obtained; extrapolations are in line with the market.
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