Short-dated smile under rough volatility: asymptotics and numerics

Peter K. Friz, Paul Gassiat and Paolo Pigato

Quantitative Finance, 2022, vol. 22, issue 3, 463-480

Abstract: In Friz et al. [Precise asymptotics for robust stochastic volatility models. Ann. Appl. Probab, 2021, 31(2), 896–940], we introduce a new methodology to analyze large classes of (classical and rough) stochastic volatility models, with special regard to short-time and small-noise formulae for option prices, using the framework [Bayer et al., A regularity structure for rough volatility. Math. Finance, 2020, 30(3), 782–832]. We investigate here the fine structure of this expansion in large deviations and moderate deviations regimes, together with consequences for implied volatility. We discuss computational aspects relevant for the practical application of these formulas. We specialize such expansions to prototypical rough volatility examples and discuss numerical evidence.

Date: 2022
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Working Paper: Short dated smile under Rough Volatility: asymptotics and numerics (2021)
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DOI: 10.1080/14697688.2021.1999486

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