Volatility has to be rough

DOI10.1080/14697688.2020.1825781zbMATH Open1484.91474arXiv2002.09215OpenAlexW3094352506MaRDI QIDQ5014164FDOQ5014164

Authors: Masaaki Fukasawa 

Publication date: 1 December 2021

Published in: Quantitative Finance (Search for Journal in Brave)

Abstract: First, we give an asymptotic expansion of short-dated at-the-money implied volatility that refines the preceding works and proves in particular that non-rough volatility models are inconsistent to a power law of volatility skew. Second, we show that given a power law of volatility skew in an option market, a continuous price dynamics of the underlying asset with non-rough volatility admits an arbitrage opportunity. The volatility therefore has to be rough in a viable market of the underlying asset of which the volatility skew obeys a power law.

Full work available at URL: https://arxiv.org/abs/2002.09215

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Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20)

Cites Work

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Cited In (27)

• Short communication: on the weak convergence rate in the discretization of rough volatility models
• Buy rough, sell smooth
• Approximation of Stochastic Volterra Equations with kernels of completely monotone type
• Implied roughness in the term structure of oil market volatility
• Log-Modulated Rough Stochastic Volatility Models
• Interest rate convexity in a Gaussian framework
• Statistical inference for rough volatility: central limit theorems
• Spiking the Volatility Punch
• Short-dated smile under rough volatility: asymptotics and numerics
• VIX pricing in the rBergomi model under a regime switching change of measure
• Robust control in a rough environment
• Rough volatility via the Lamperti transform
• On asymptotically arbitrage-free approximations of the implied volatility
• Power variations and limit theorems for stochastic processes controlled by fractional Brownian motions
• Local volatility under rough volatility
• Statistical inference for rough volatility: minimax theory
• Option pricing in sandwiched Volterra volatility model
• Refinement by reducing and reusing random numbers of the hybrid scheme for Brownian semistationary processes
• Power law in Sandwiched Volterra Volatility model
• From rough to multifractal volatility: the log S-fBm model
• The characteristic function of Gaussian stochastic volatility models: an analytic expression
• Wiener Spiral for Volatility Modeling
• Path shadowing Monte Carlo
• Finite arbitrage times and the volatility smile?
• Short-time implied volatility of additive normal tempered stable processes
• Volterra square-root process: stationarity and regularity of the law
• A partial rough path space for rough volatility

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