Arbitrage-Free Implied Volatility Surface Reconstruction via Additive Martingales

arXiv:2610.25671 · q-fin.CP, cs.LG · Submitted 2026-10-19 · Read on arXiv

q-fin.CP, cs.LG

Submitted: 2026-10-19

Updated: 2026-10-19

Comments: 41 pages, 15 figures. Includes supplementary proofs and experimental analyses in the appendices

License: http://creativecommons.org/licenses/by/4.0/

The gist: This work focuses on reconstructing a continuous implied volatility (IV) surface from a small number of option quotes, a fundamental task for option pricing and risk management.

Abstract

This work focuses on reconstructing a continuous implied volatility (IV) surface from a small number of option quotes, a fundamental task for option pricing and risk management. We propose Additive Martingale (AddMart), a few-shot IV surface reconstruction framework that satisfies static no-arbitrage conditions by construction. Rather than predicting IVs directly, AddMart maps sparse quotes to non-negative increment densities of an exponential additive martingale, from which valid risk-neutral marginals and IVs are recovered. By incorporating the no-arbitrage structure directly into its architecture, rather than enforcing it through regularization in the learning objective, AddMart produces IV surfaces that satisfy static no-arbitrage conditions throughout the domain. Extensive experiments on ten real-option datasets demonstrate that AddMart achieves competitive reconstruction accuracy with no material static arbitrage violations, while directly enabling the estimation of VaR, CVaR, and crash probabilities.

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