English

SANOS Smooth strictly Arbitrage-free Non-parametric Option Surfaces

Computational Finance 2026-05-25 v4 Mathematical Finance

Abstract

We present a simple, numerically efficient but highly flexible non-parametric method to construct representations of option price surfaces which are both smooth and strictly arbitrage-free across time and strike. The method can be viewed as a smooth generalization of the widely-known linear interpolation scheme, and retains the simplicity and transparency of that baseline. Calibration of the model to observed market quotes is formulated as a linear program, allowing bid-ask spreads to be incorporated directly via linear penalties or inequalities, and delivering materially lower computational cost than most of the currently available implied-volatility surface fitting routines. As a further contribution, we derive an equivalent parameterization of the proposed surface in terms of strictly positive "discrete local volatility" variables. This yields, to our knowledge, the first construction of smooth, strictly arbitrage-free option price surfaces while requiring only trivial parameter constraints (positivity). We illustrate the approach using S&P 500 index options

Keywords

Cite

@article{arxiv.2601.11209,
  title  = {SANOS Smooth strictly Arbitrage-free Non-parametric Option Surfaces},
  author = {Hans Buehler and Blanka Horvath and Anastasis Kratsios and Yannick Limmer and Raeid Saqur},
  journal= {arXiv preprint arXiv:2601.11209},
  year   = {2026}
}

Comments

23 pages

R2 v1 2026-07-01T09:07:25.954Z