Large deviation principle for Volterra type fractional stochastic volatility models

DOI10.1137/17M116344XMaRDI QIDQ4553805zbMATH OpenOpenAlexFDO

Authors Archil Gulisashvili

Publication date 31 October 2018

Published in SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1710.10711

zbMATH Keywords

fractional stochastic volatility modelsimplied volatilitylarge deviationsself-similarityVolterra type Gaussian processes

Mathematics Subject Classification ID

Large deviations (60F10) Gaussian processes (60G15) Self-similar stochastic processes (60G18) Fractional processes, including fractional Brownian motion (60G22) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: We study fractional stochastic volatility models in which the volatility process is a positive continuous function $sigma$ of a continuous Gaussian process $widehatB$. Forde and Zhang established a large deviation principle for the log-price process in such a model under the assumptions that the function $sigma$ is globally H"{o}lder-continuous and the process $widehatB$ is fractional Brownian motion. In the present paper, we prove a similar small-noise large deviation principle under weaker restrictions on $sigma$ and $widehatB$. We assume that $sigma$ satisfies a mild local regularity condition, while the process $widehatB$ is a Volterra type Gaussian process. Under an additional assumption of the self-similarity of the process $widehatB$, we derive a large deviation principle in the small-time regime. As an application, we obtain asymptotic formulas for binary options, call and put pricing functions, and the implied volatility in certain mixed regimes.

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Cited in

(23)

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