A Multi-Parameter Extension of Figlewski’s Option-Pricing Formula

Figlewski [2002] has pointed out that there is nothing special about the Black–Scholes equation if the model is used for interpolation. Figlewski introduced a single-parameter alternative function. This function was extended by Henderson, Hobson, and Kluge [2007] to incorporate maturity. Although single-parameter option pricing models are not suitable interpolants, the empirical findings of Figlewski and Henderson et al. suggest that multi-parameter extensions of the model are. We demonstrate that the model can be extended to incorporate several parameters using quadratic programming. The primary advantages of the proposed framework are that the resultant models are free of static arbitrage, and have a desirable empirical performance