On the analysis of Ait-Sahalia-type model for rough volatility modelling (Q6204804)

The Ait-Sahalia-type model for rough volatility modeling has been the subject of extensive analysis in recent years. Various researchers and practitioners have explored its applicability in capturing the irregularities observed in asset price volatility paths. This paper delved into the analysis of such models, specifically focusing on stochastic differential equations (SDEs) driven by fractional Brownian motion, which exhibits lower \(\alpha\)-Hölder regularity with \(\alpha\in (0, 1/2)\). In this study, the need for models accommodating rough signals, such as fractional Brownian motion, to effectively represent the volatility dynamics of asset prices was highlighted. The Ait-Sahalia model, originally designed for interest rate modeling, was extended to address the dynamics of stochastic volatility in asset prices. However, empirical evidence suggests that the original Ait-Sahalia model may not adequately capture the volatility characteristics observed in interest rate paths. \[ dX_t = \bigg(\alpha_{-1} X_{t}^{-1} - \alpha_0 + \alpha_1 X_t - \alpha_2 t^{2H-1} X_{t}^{\rho} \bigg)dt + \sigma X_{t}^{\theta} dB_{t}^H \tag{1} \] The paper presented an extended Ait-Sahalia model, expressed through SDEs, which incorporate fractional Brownian motion as the driving noise. Emphasis was placed on a particular formulation of the model, denoted as SDE (1), which accounts for mean reversion properties crucial in finance. The study established the existence and uniqueness of solutions to SDE (1) by employing mathematical techniques distinct from previous approaches. Throughout the analysis, comparisons were drawn with existing literature, elucidating the novel contributions of the current study. The paper concluded with a structured outline of its contents, highlighting the sections devoted to introducing the fractional Ait-Sahalia-type model, establishing existence and uniqueness results for solutions to SDE (1), and discussing alternative model formulations. In summary, this paper contributes to the ongoing discourse on rough volatility modeling by providing a comprehensive analysis of the Ait-Sahalia-type model and its extensions, thereby enriching our understanding of the dynamics governing asset price volatility.