EconPapers    
Economics at your fingertips  
 

Multi-factor approximation of rough volatility models

Eduardo Abi jaber () and Omar El Euch ()
Additional contact information
Eduardo Abi jaber: CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris-Dauphine - CNRS - Centre National de la Recherche Scientifique
Omar El Euch: X - École polytechnique

Working Papers from HAL

Abstract: Rough volatility models are very appealing because of their remarkable fit of both historical and implied volatilities. However, due to the non-Markovian and non-semimartingale nature of the volatility process, there is no simple way to simulate efficiently such models, which makes risk management of derivatives an intricate task. In this paper, we design tractable multi-factor stochastic volatility models approximating rough volatility models and enjoying a Markovian structure. Furthermore, we apply our procedure to the specific case of the rough Heston model. This in turn enables us to derive a numerical method for solving fractional Riccati equations appearing in the characteristic function of the log-price in this setting.

Keywords: limit theorems; affine Volterra processes; Rough volatility models; rough Heston models; stochastic Volterra equations; fractional Riccati equations (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ets and nep-rmg
Date: 2018-04-10
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01697117v3
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
https://hal.archives-ouvertes.fr/hal-01697117v3/document (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-01697117

Access Statistics for this paper

More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD ().

 
Page updated 2018-04-25
Handle: RePEc:hal:wpaper:hal-01697117