Complex discontinuities of the square root of Fredholm determinants in the Volterra Stein-Stein model

Eduardo Abi Jaber and Maxime Guellil

Papers from arXiv.org

Abstract: Fourier-based methods are central to option pricing and hedging when the Fourier-Laplace transform of the log-price and integrated variance is available semi-explicitly. This is the case for the Volterra Stein-Stein stochastic volatility model, where the characteristic function is known analytically. However, naive evaluation of this formula can produce discontinuities due to the complex square root of a Fredholm determinant, particularly when the determinant crosses the negative real axis, leading to severe numerical instabilities. We analyze this phenomenon by characterizing the determinant's crossing behavior for the joint Fourier-Laplace transform of integrated variance and log-price. We then derive an expression for the transform to account for such crossings and develop efficient algorithms to detect and handle them. Applied to Fourier-based pricing in the rough Stein-Stein model, our approach significantly improves accuracy while drastically reducing computational cost relative to existing methods.

Date: 2025-03, Revised 2025-11
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