Affine forward variance models

Jim Gatheral () and Martin Keller-Ressel ()
Additional contact information
Jim Gatheral: CUNY
Martin Keller-Ressel: TU Dresden

Finance and Stochastics, 2019, vol. 23, issue 3, No 2, 533 pages

Abstract: Abstract We introduce the class of affine forward variance (AFV) models of which both the conventional Heston model and the rough Heston model are special cases. We show that AFV models can be characterised by the affine form of their cumulant-generating function, which can be obtained as solution of a convolution Riccati equation. We further introduce the class of affine forward order flow intensity (AFI) models, which are structurally similar to AFV models, but driven by jump processes, and which include Hawkes-type models. We show that the cumulant-generating function of an AFI model satisfies a generalised convolution Riccati equation and that a high-frequency limit of AFI models converges in distribution to an AFV model.

Keywords: Stochastic volatility; Rough volatility; Riccati equation; Affine process; Hawkes process; 91G20; 60G22 (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (32)

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DOI: 10.1007/s00780-019-00392-5

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