Rough-Heston Local-Volatility Model

Enrico Dall'Acqua, Riccardo Longoni and Andrea Pallavicini

Papers from arXiv.org

Abstract: In industrial applications it is quite common to use stochastic volatility models driven by semi-martingale Markov volatility processes. However, in order to fit exactly market volatilities, these models are usually extended by adding a local volatility term. Here, we consider the case of singular Volterra processes, and we extend them by adding a local-volatility term to their Markov lift by preserving the stylized results implied by these models on plain-vanilla options. In particular, we focus on the rough-Heston model, and we analyze the small time asymptotics of its implied local-volatility function in order to provide a proper extrapolation scheme to be used in calibration.

Date: 2022-06
New Economics Papers: this item is included in nep-rmg
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