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Large deviation principle for Volterra type fractional stochastic volatility models

Mathematical Finance 2018-08-06 v6

Abstract

We study fractional stochastic volatility models in which the volatility process is a positive continuous function σ\sigma of a continuous Gaussian process B^\widehat{B}. Forde and Zhang established a large deviation principle for the log-price process in such a model under the assumptions that the function σ\sigma is globally H\"{o}lder-continuous and the process B^\widehat{B} is fractional Brownian motion. In the present paper, we prove a similar small-noise large deviation principle under weaker restrictions on σ\sigma and B^\widehat{B}. We assume that σ\sigma satisfies a mild local regularity condition, while the process B^\widehat{B} is a Volterra type Gaussian process. Under an additional assumption of the self-similarity of the process B^\widehat{B}, we derive a large deviation principle in the small-time regime. As an application, we obtain asymptotic formulas for binary options, call and put pricing functions, and the implied volatility in certain mixed regimes.

Keywords

Cite

@article{arxiv.1710.10711,
  title  = {Large deviation principle for Volterra type fractional stochastic volatility models},
  author = {Archil Gulisashvili},
  journal= {arXiv preprint arXiv:1710.10711},
  year   = {2018}
}
R2 v1 2026-06-22T22:29:07.606Z