Risk premium and rough volatility

Ofelia Bonesini, Antoine Jacquier and Aitor Muguruza

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: On the one hand, rough volatility has been shown to provide a consistent framework to capture the properties of stock price dynamics both under the historical measure and for pricing purposes. On the other hand, market price of volatility risk is a well-studied object in financial economics, and empirical estimates show it to be stochastic rather than deterministic. Starting from a rough volatility model under the historical measure, we take up this challenge and provide an analysis of the impact of such a non-deterministic risk for pricing purposes.

Keywords: fractional Brownian motion; risk premium; rough volatility (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2025-12-11
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Published in Frontiers of Mathematical Finance, 11, December, 2025, 7, pp. 78-94. ISSN: 2769-6715

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