Related papers: Pricing variance swaps with stochastic volatility …
We present a semi-static hedging algorithm for callable interest rate derivatives under an affine, multi-factor term-structure model. With a traditional dynamic hedge, the replication portfolio needs to be updated continuously through time…
Rough volatility models are very appealing because of their remarkable fit of both historical and implied volatilities. However, due to the non-Markovian and non-semimartingale nature of the volatility process, there is no simple way to…
In this paper, we propose an iterative splitting method to solve the partial differential equations in option pricing problems. We focus on the Heston stochastic volatility model and the derived two-dimensional partial differential equation…
We combine the unbiased estimators in Rhee and Glynn (Operations Research: 63(5), 1026-1043, 2015) and the Heston model with stochastic interest rates. Specifically, we first develop a semi-exact log-Euler scheme for the Heston model with…
In this paper, we consider three stochastic-volatility models, each characterized by distinct dynamics of instantaneous volatility: (1) a CIR process for squared volatility (i.e., the classical Heston model); (2) a mean-reverting lognormal…
We develop a novel observation-driven model for high-frequency prices. We account for irregularly spaced observations, simultaneous transactions, discreteness of prices, and market microstructure noise. The relation between trade durations…
This paper advances interest rate modeling in the post-LIBOR era by introducing rough stochastic volatility into the Forward Market Model (FMM). We establish a rigorous asymptotic expansion of swaption implied volatility, connecting the FMM…
We consider closed-form approximations for European put option prices within the Heston and GARCH diffusion stochastic volatility models with time-dependent parameters. Our methodology involves writing the put option price as an expectation…
We develop a model to price inflation and interest rates derivatives using continuous-time dynamics that have some links with macroeconomic monetary DSGE models equipped with a Taylor rule: in particular, the reaction function of the…
Valuing Guaranteed Minimum Withdrawal Benefit (GMWB) has attracted significant attention from both the academic field and real world financial markets. As remarked by Yang and Dai, the Black and Scholes framework seems to be inappropriate…
Rough volatility models are known to reproduce the behavior of historical volatility data while at the same time fitting the volatility surface remarkably well, with very few parameters. However, managing the risks of derivatives under…
Recent empirical studies suggest that the volatilities associated with financial time series exhibit short-range correlations. This entails that the volatility process is very rough and its autocorrelation exhibits sharp decay at the…
The accurate prediction of short-term electricity prices is vital for effective trading strategies, power plant scheduling, profit maximisation and efficient system operation. However, uncertainties in supply and demand make such…
Stochastic volatility models based on Gaussian processes, like fractional Brownian motion, are able to reproduce important stylized facts of financial markets such as rich autocorrelation structures, persistence and roughness of sample…
We propose a new high-order alternating direction implicit (ADI) finite difference scheme for the solution of initial-boundary value problems of convection-diffusion type with mixed derivatives and non-constant coefficients, as they arise…
We consider a tick-by-tick model of price formation, in which buy and sell orders are modeled as self-exciting point processes (Hawkes process), similar to the one in [Bacry, Delattre, Hoffmann, Muzy, Modelling microstructure noise with…
Long maturity options or a wide class of hybrid products are evaluated using a local volatility type modelling for the asset price S(t) with a stochastic interest rate r(t). The calibration of the local volatility function is usually…
We study an extension of the Heston stochastic volatility model that incorporates rough volatility and jump clustering phenomena. In our model, named the rough Hawkes Heston stochastic volatility model, the spot variance is a rough…
We address the challenges of modeling high-frequency integer price changes in financial markets using continuous distributions, particularly the Student's t-distribution. We demonstrate that traditional GARCH models, which rely on…
The variance--covariance matrix plays a central role in the inferential theories of high-dimensional factor models in finance and economics. Popular regularization methods of directly exploiting sparsity are not directly applicable to many…