On the Guyon-Lekeufack Volatility Model

Marcel Nutz and Andr\'es Riveros Valdevenito

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Abstract: Guyon and Lekeufack recently proposed a path-dependent volatility model and documented its excellent performance in fitting market data and capturing stylized facts. The instantaneous volatility is modeled as a linear combination of two processes, one is an integral of weighted past price returns and the other is the square-root of an integral of weighted past squared volatility. Each of the weightings is built using two exponential kernels reflecting long and short memory. Mathematically, the model is a coupled system of four stochastic differential equations. Our main result is the wellposedness of this system: the model has a unique strong (non-explosive) solution for all parameter values. We also study the positivity of the resulting volatility process and the martingale property of the associated exponential price process.

Date: 2023-07, Revised 2024-07
New Economics Papers: this item is included in nep-rmg
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