Power law in Sandwiched Volterra Volatility model

Giulia Di Nunno and Anton Yurchenko-Tytarenko

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Abstract: In this paper, we present analytical proof demonstrating that the Sandwiched Volterra Volatility (SVV) model is able to reproduce the power-law behavior of the at-the-money implied volatility skew, provided the correct choice of the Volterra kernel. To obtain this result, we assess the second-order Malliavin differentiability of the volatility process and investigate the conditions that lead to explosive behavior in the Malliavin derivative. As a supplementary result, we also prove a general Malliavin product rule.

Date: 2023-11
New Economics Papers: this item is included in nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2311.01228

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