Small‐time, large‐time, and asymptotics for the Rough Heston model

DOI10.1111/MAFI.12290MaRDI QIDQ6078436zbMATH OpenOpenAlexFDO

Authors

Publication date 27 September 2023

Published in Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1906.09034

zbMATH Keywords

asymptoticsimplied volatilityintegral equationsrandom fieldsrough Heston modelrough volatility

Mathematics Subject Classification ID

Random fields (60G60) Stochastic models in economics (91B70) Financial markets (91G15) Derivative securities (option pricing, hedging, etc.) (91G20)

Abstract: We characterize the behaviour of the Rough Heston model introduced by Jaisson&Rosenbaum cite{JR16} in the small-time, large-time and $alphao1/2$ (i.e. $Ho0$) limits. We show that the short-maturity smile scales in qualitatively the same way as a general rough stochastic volatility model (cf. cite{FZ17}, cite{FGP18a} et al.), and the rate function is equal to the Fenchel-Legendre transform of a simple transformation of the solution to the same Volterra integral equation (VIE) that appears in cite{ER19}, but with the drift and mean reversion terms removed. The solution to this VIE satisfies a space-time scaling property which means we only need to solve this equation for the moment values of $p=1$ and $p=-1$ so the rate function can be efficiently computed using an Adams scheme or a power series, and we compute a power series in the log-moneyness variable for the asymptotic implied volatility which yields tractable expressions for the implied vol skew and convexity. The limiting asymptotic smile in the large-maturity regime is obtained via a stability analysis of the fixed points of the VIE, and is the same as for the standard Heston model in cite{FJ11}. Finally, using L'{e}vy's convergence theorem, we show that the log stock price $X_t$ tends weakly to a non-symmetric random variable $X_t^{(1/2)}$ as $alphao1/2$ (i.e. $Ho0$) whose mgf is also the solution to the Rough Heston VIE with $alpha=1/2$, and we show that $X_t^{(1/2)}/sqrtt$ tends weakly to a non-symmetric random variable as $to0$, which leads to a non-flat non-symmetric asymptotic smile in the Edgeworth regime. We also show that the third moment of the log stock price tends to a finite constant as $Ho0$ (in contrast to the Rough Bergomi model discussed in cite{FFGS20} where the skew flattens or blows up) and the $V$ process converges on pathspace to a random tempered distribution.

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Cited in

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• Large deviations for the extended Heston model: the large-time case
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• Asymptotic behavior of the fractional Heston model
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