Rough-Heston Local-Volatility Model
Pricing of Securities
2022-06-22 v1 Mathematical Finance
Abstract
In industrial applications it is quite common to use stochastic volatility models driven by semi-martingale Markov volatility processes. However, in order to fit exactly market volatilities, these models are usually extended by adding a local volatility term. Here, we consider the case of singular Volterra processes, and we extend them by adding a local-volatility term to their Markov lift by preserving the stylized results implied by these models on plain-vanilla options. In particular, we focus on the rough-Heston model, and we analyze the small time asymptotics of its implied local-volatility function in order to provide a proper extrapolation scheme to be used in calibration.
Keywords
Cite
@article{arxiv.2206.09220,
title = {Rough-Heston Local-Volatility Model},
author = {Enrico Dall'Acqua and Riccardo Longoni and Andrea Pallavicini},
journal= {arXiv preprint arXiv:2206.09220},
year = {2022}
}