After you work in volatility field for a while, you may figure out when (and when not) to use the word "theoretical". There's probably no standard definition of it. I guess it basically means "according-to-BS". It can also mean risk-neutral. All the greeks and many of the pricing formulas are theoretical.

The opposite of theoretical is typically "observed on the market", or adjusted for ~~skew ~~or ~~tail~~.

Now, the volatility smile, the volatility term structure and the vol surface are a departure from BS. These are empirical models, fitted against observed market quotes. Ignoring outliers among raw data, the fitted vol surface must agree with observed market prices -- empirical.

## Wednesday, October 24, 2012

### theoretical numbers ^ vol surface

at Wednesday, October 24, 2012

Labels: finVol

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