Comparing Practical Models for Smoothing Equity Option Volatility Skews

Summary

This document asks how to choose a practical model for smoothing and interpolating implied volatility skews and surfaces. The intended application is short-dated European index options, with a goal of obtaining more usable implied volatilities through interpolation and extrapolation while maintaining an arbitrage-free skew. Cubic splines and variants of SVI are mentioned as candidate approaches.

The post does not compare models or provide empirical results; it solicits research references and practitioner opinions. Its central consideration is the balance between model feasibility, strengths and weaknesses, and ease of implementation. The discussion is limited to the question and its proposed use case, so it offers no recommendation, calibration procedure, or evidence that any candidate achieves arbitrage freedom or performs best on short maturities.

Key ideas

• The question concerns smoothing and extending implied volatility skews for European index options.
• The target use case emphasizes short maturities and maximizing usable volatility estimates.
• Cubic splines and SVI variants are proposed as candidate techniques.
• Model selection is framed as a tradeoff between practical implementation and model properties.
• The document provides no comparative evidence or recommended method.

Tags

# What are some effective and easily implementable volatility smile/skew smoothing models?


# What are some effective and easily implementable volatility smile/skew smoothing models?












Inspired by another post on Bakshi et al. (1997), the paper talks about the feasibility of option pricing models, particularly the SVSI-J variant.

I would like to ask the Quant community if there are any papers or if you could lend me your opinion on common volatility skew/smile/surface smoothing models. I am looking for something like Bakshi et al. (1997), that focuses on evaluating the feasibility of different volatility smoothing models (instead of option pricing models) and talks about what they are good and bad at vs the practicality of implementation (how easy it is to implement).

Ultimately, I am looking to implement a volatility smoothing model for an equity volatility skew for option-implied volatilities of European index options (mostly short-term maturity, think less than 60 days-to-maturity) with a focus on maximizing the number of option-implied volatilities (as a result of the inter/extrapolation and smoothing for an arbitrage-free skew).

Some things I have looked at thus far: cubic spline for volatility skew inter/extrapolation and SVI variants for volatility smoothing.

Much thanks!

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