The Rough Path-Dependent Volatility Model

Léo Parent ()
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Léo Parent: UP1 - Université Paris 1 Panthéon-Sorbonne, PRISM Sorbonne - Pôle de recherche interdisciplinaire en sciences du management - UP1 - Université Paris 1 Panthéon-Sorbonne

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Abstract: This paper introduces the rough path-dependent volatility (RPDV) model, which is structurally adapted to jointly capturing two major empirical features of volatility, namely its rough behavior and path-dependence. After presenting the model in its general form and its link with other existing models in the literature, we then present a Markovian multi-factor approximation of the RPDV model based on the work of Abi Jaber (2019). Finally, the paper focuses on a selection of RPDV model specifications that are interpretable from an economic point of view, leading to the formulation of different hypotheses about both asset price and volatility formation mechanisms.

Keywords: Volatility modeling; path-dependent volatility; rough volatility; endogeneity; Zumbach effect; time-reversal asymmetry; joint price and volatility dynamics. (search for similar items in EconPapers)
Date: 2023-03-02
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-04012310

DOI: 10.2139/ssrn.4270481

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