Reconstructing Volatility: Pricing of Index Options under Rough Volatility
Pricing of Securities
2022-12-16 v1 Probability
Abstract
In previous works Avellaneda et al. pioneered the pricing and hedging of index options - products highly sensitive to implied volatility and correlation assumptions - with large deviations methods, assuming local volatility dynamics for all components of the index. We here present an extension applicable to non-Markovian dynamics and in particular the case of rough volatility dynamics.
Cite
@article{arxiv.2212.07817,
title = {Reconstructing Volatility: Pricing of Index Options under Rough Volatility},
author = {Peter K. Friz and Thomas Wagenhofer},
journal= {arXiv preprint arXiv:2212.07817},
year = {2022}
}
Comments
22 pages, This version to appear in Mathematical Finance