Arbitrage-Aware Multi-Step Forecasting of Implied Volatility Surfaces: Modelling Surface Trajectories Using Latent Diffusion

• URL: http://arxiv.org/abs/2608.22478v1
• Date: Sun, 23 Aug 2026 16:04:08 GMT
• Title: Arbitrage-Aware Multi-Step Forecasting of Implied Volatility Surfaces: Modelling Surface Trajectories Using Latent Diffusion
• Abstract summary: Implied volatility surfaces summarise the option market and are central to many financial applications.<n>We propose a conditional latent diffusion framework for generating joint 30-step trajectories of implied volatility surfaces and underlying returns.
• Score: 6.623217355591568
• License: http://creativecommons.org/licenses/by/4.0/
• Abstract: 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 persistence benchmark in point forecasting.

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