Cutting Edge introduction: Continuity error
Continuity error
Opinion was divided when Jesper Andreasen and Brian Huge – quants at Danske Bank in Copenhagen – unveiled a radical way to generate implied volatilities in two 2011 articles (Risk March 2011, pages 76–79, and Risk July 2011, pages 66–71). On the one hand, the new method promised arbitrage-free prices, but it did so by abandoning the continuous time model that is traditionally seen as the ideal.
Andreasen has been disarmingly blunt about this sacrifice. “I don’t care,” he told one audience member
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