Markovian approximation of the rough Bergomi model for Monte Carlo option pricing

Qinwen Zhu, Gr\'egoire Loeper, Wen Chen and Nicolas Langren\'e

Papers from arXiv.org

Abstract: The recently developed rough Bergomi (rBergomi) model is a rough fractional stochastic volatility (RFSV) model which can generate more realistic term structure of at-the-money volatility skews compared with other RFSV models. However, its non-Markovianity brings mathematical and computational challenges for model calibration and simulation. To overcome these difficulties, we show that the rBergomi model can be approximated by the Bergomi model, which has the Markovian property. Our main theoretical result is to establish and describe the affine structure of the rBergomi model. We demonstrate the efficiency and accuracy of our method by implementing a Markovian approximation algorithm based on a hybrid scheme.

Date: 2020-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Mathematics 9(5) 528 (2021)

Downloads: (external link)
http://arxiv.org/pdf/2007.02113 Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2007.02113

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().