Arbitrage-Free Option Price Surfaces via Chebyshev Tensor Bases and a Hamiltonian Fog Post-Fit
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arXiv
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| Format: | Preprint |
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2025
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| author | Alvarez, Robert Jenkinson |
| author_facet | Alvarez, Robert Jenkinson |
| contents | We study the construction of arbitrage-free option price surfaces from noisy bid-ask quotes across strike and maturity. Our starting point is a Chebyshev representation of the call price surface on a warped log-moneyness/maturity rectangle, together with linear sampling and no-arbitrage operators acting on a collocation grid. Static no-arbitrage requirements are enforced as linear inequalities, while the surface is fitted directly to prices via a coverage-seeking quadratic objective that trades off squared band misfit against spectral and transport-inspired regularisation of the Chebyshev coefficients. This yields a strictly convex quadratic program in the modal coefficients, solvable at practical scales with off-the-shelf solvers (OSQP).
On top of the global backbone, we introduce a local post-fit layer based on a discrete fog of risk-neutral densities on a three-dimensional lattice (m,t,u) and an associated Hamiltonian-type energy. On each patch of the (m,t) plane, the fog variables are coupled to a nodal price field obtained from the baseline surface, yielding a joint convex optimisation problem that reweights noisy quotes and applies noise-aware local corrections while preserving global static no-arbitrage and locality.
The method is designed such that for equity options panels, the combined procedure achieves high inside-spread coverage in stable regimes (in calm years, 98-99% of quotes are priced inside the bid-ask intervals) and low rates of static no-arbitrage violations (below 1%). In stressed periods, the fog layer provides a mechanism for controlled leakage outside the band: when local quotes are mutually inconsistent or unusually noisy, the optimiser allocates fog mass outside the bid-ask tube and justifies small out-of-band deviations of the post-fit surface, while preserving a globally arbitrage-free and well-regularised description of the option surface. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2512_01967 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Arbitrage-Free Option Price Surfaces via Chebyshev Tensor Bases and a Hamiltonian Fog Post-Fit Alvarez, Robert Jenkinson Mathematical Finance 91G20 (Primary) 91G60, 65K10 (Secondary) We study the construction of arbitrage-free option price surfaces from noisy bid-ask quotes across strike and maturity. Our starting point is a Chebyshev representation of the call price surface on a warped log-moneyness/maturity rectangle, together with linear sampling and no-arbitrage operators acting on a collocation grid. Static no-arbitrage requirements are enforced as linear inequalities, while the surface is fitted directly to prices via a coverage-seeking quadratic objective that trades off squared band misfit against spectral and transport-inspired regularisation of the Chebyshev coefficients. This yields a strictly convex quadratic program in the modal coefficients, solvable at practical scales with off-the-shelf solvers (OSQP). On top of the global backbone, we introduce a local post-fit layer based on a discrete fog of risk-neutral densities on a three-dimensional lattice (m,t,u) and an associated Hamiltonian-type energy. On each patch of the (m,t) plane, the fog variables are coupled to a nodal price field obtained from the baseline surface, yielding a joint convex optimisation problem that reweights noisy quotes and applies noise-aware local corrections while preserving global static no-arbitrage and locality. The method is designed such that for equity options panels, the combined procedure achieves high inside-spread coverage in stable regimes (in calm years, 98-99% of quotes are priced inside the bid-ask intervals) and low rates of static no-arbitrage violations (below 1%). In stressed periods, the fog layer provides a mechanism for controlled leakage outside the band: when local quotes are mutually inconsistent or unusually noisy, the optimiser allocates fog mass outside the bid-ask tube and justifies small out-of-band deviations of the post-fit surface, while preserving a globally arbitrage-free and well-regularised description of the option surface. |
| title | Arbitrage-Free Option Price Surfaces via Chebyshev Tensor Bases and a Hamiltonian Fog Post-Fit |
| topic | Mathematical Finance 91G20 (Primary) 91G60, 65K10 (Secondary) |
| url | https://arxiv.org/abs/2512.01967 |