Log-Modulated Rough Stochastic Volatility Models

DOI10.1137/20M135902XMaRDI QIDQ5162852zbMATH OpenOpenAlexFDO

Authors Christian Bayer, Fabian A. Harang, Paolo Pigato

Publication date 5 November 2021

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

Full work available at URL https://arxiv.org/abs/2008.03204

zbMATH Keywords

fractional Brownian motionimplied skewlog Brownian motionrough Bergomi modelrough volatility modelsstochastic volatility

Mathematics Subject Classification ID

Fractional processes, including fractional Brownian motion (60G22) Interest rates, asset pricing, etc. (stochastic models) (91G30) Financial applications of other theories (91G80)

Abstract: We propose a new class of rough stochastic volatility models obtained by modulating the power-law kernel defining the fractional Brownian motion (fBm) by a logarithmic term, such that the kernel retains square integrability even in the limit case of vanishing Hurst index $H$. The so-obtained log-modulated fractional Brownian motion (log-fBm) is a continuous Gaussian process even for $H=0$. As a consequence, the resulting super-rough stochastic volatility models can be analysed over the whole range $0leH<1/2$ without the need of further normalization. We obtain skew asymptotics of the form $log(1/T{)}^{-p}{T}^{H-1/2}$ as $To0$, $Hge0$, so no flattening of the skew occurs as $Ho0$.

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Cited in

(11)

• The Riemann-Liouville field and its GMC as \(H \to 0\), and skew flattening for the rough Bergomi model
• From rough to multifractal volatility: the log S-fBm model
• On the density of log-spot in the Heston volatility model
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