Arbitrage-Aware Multi-Step Forecasting of Implied Volatility Surfaces: Modelling Surface Trajectories Using Latent Diffusion
Implied volatility surfaces summarise the option market and are central to many financial applications. Forecasting their future evolution requires modelling two-dimensional geometry, temporal dependence, and predictive uncertainty while preserving economic admissibility. We propose a conditional latent diffusion framework for generating joint 30-step trajectories of implied volatility surfaces and underlying returns. An arbitrage-aware autoencoder learns a low-dimensional surface representation, while the diffusion model captures the conditional joint evolution. Evaluated on SPX surfaces, the framework generates realistic probabilistic multi-step scenarios while also outperforming the pe...
| Authors | Dominik Manuel Buchegger, Lukas Gonon |
|---|---|
| Primary category | q-fin.MF |
| Published | 23 August 2026 |
| Last updated at source | 23 August 2026 |
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