A Construction of Volatility Surfaces for Futures Markets

22 Pages Posted: 24 Jun 2016

See all articles by Qimou Su

Qimou Su

SciComp Inc.

Ni Xiao

University of Chicago

J Randall Curtis

University of Washington, School of Medicine, Harborview Medical Center, Cambia Palliative Care Center of Excellence

Date Written: March 20, 2015

Abstract

This paper reports a practical approach to constructing arbitrage-free volatility surfaces that are consistent with the observed options smiles and Samuelson effect in futures markets. A separate volatility surface is created for each futures contract. The algorithm is fast, robust and able to match the entire market-implied volatility surface within a couple of basis points. The local volatility and marginal distribution surfaces for the futures price are also provided. We use data from New York Mercantile Exchange West Texas Intermediate (NYMEX WTI) oil to demonstrate the algorithm.

Keywords: commodity, futures, volatility surface, local volatility, Samuelson effect, energy markets

Suggested Citation

Su, Qimou and Xiao, Ni and Curtis, J Randall, A Construction of Volatility Surfaces for Futures Markets (March 20, 2015). Journal of Energy Markets, Vol. 8, No. 1, 2015, Available at SSRN: https://ssrn.com/abstract=2800081

Qimou Su (Contact Author)

SciComp Inc. ( email )

5806 Mesa Dr
#250
Austin, TX 78731
United States

Ni Xiao

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

J Randall Curtis

University of Washington, School of Medicine, Harborview Medical Center, Cambia Palliative Care Center of Excellence ( email )

WA
United States

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