Correction to Black-Scholes formula due to fractional stochastic volatility
Mathematical Finance
2017-03-21 v2
Abstract
Empirical studies show that the volatility may exhibit correlations that decay as a fractional power of the time offset. The paper presents a rigorous analysis for the case when the stationary stochastic volatility model is constructed in terms of a fractional Ornstein Uhlenbeck process to have such correlations. It is shown how the associated implied volatility has a term structure that is a function of maturity to a fractional power.
Keywords
Cite
@article{arxiv.1509.01175,
title = {Correction to Black-Scholes formula due to fractional stochastic volatility},
author = {Josselin Garnier and Knut Solna},
journal= {arXiv preprint arXiv:1509.01175},
year = {2017}
}