SVI
The Arrow Markets pricing engine fits SVI curves for implied volatility
For our benchmark prices, we use SVI models (so-called stochastic volatility-inspired models), which provide tractable volatility curve parameterizations. Options market makers and traders commonly use these models. Here are some key references on the SVI approach: URL.
The SVI model specifies the implied volatility curve as essentially a second-order expansion around log moneyness
where we enforce the relation
The parameters
are obtained by fitting this model to market-implied volatility quotes. In practice, this curve is refit at some frequency, and data cleaning needs to occur. Arrow's up-to-date fit frequency and data cleaning steps are maintained here: URL.
A separate set of parameters is fitted for each expiration. To get the midpoint price for an option with strike
and expiration
, we calculate the log moneyness
and consult the fitted curve associated with expiration
to get the implied volatility
The midpoint price is then the BSM price of the option given
Last modified 1mo ago