Related papers: Hedging under rough volatility
We investigate model risk and distributionally robust optimization (DRO) under marginal and martingale constraints. Building on our previous work, we address the previously open case of static hedging with second-period maturity vanilla…
We study the weak convergence rate in the discretization of rough volatility models. After showing a lower bound $2H$ under a general model, where $H$ is the Hurst index of the volatility process, we give a sharper bound $H + 1/2$ under a…
This work studies the dynamic risk management of the risk-neutral value of the potential credit losses on a portfolio of derivatives. Sensitivities-based hedging of such liability is sub-optimal because of bid-ask costs, pricing models…
In complete markets, there are risky assets and a riskless asset. It is assumed that the riskless asset and the risky asset are traded continuously in time and that the market is frictionless. In this paper, we propose a new method for…
Derivative hedging and pricing are important and continuously studied topics in financial markets. Recently, deep hedging has been proposed as a promising approach that uses deep learning to approximate the optimal hedging strategy and can…
Rough volatility models have gained considerable interest in the quantitative finance community in recent years. In this paradigm, the volatility of the asset price is driven by a fractional Brownian motion with a small value for the Hurst…
We investigate the statistical evidence for the use of `rough' fractional processes with Hurst exponent $H< 0.5$ for the modeling of volatility of financial assets, using a model-free approach. We introduce a non-parametric method for…
We introduce a new class of continuous-time models of the stochastic volatility of asset prices. The models can simultaneously incorporate roughness and slowly decaying autocorrelations, including proper long memory, which are two stylized…
This paper develops a flexible and computationally efficient multivariate volatility model, which allows for dynamic conditional correlations and volatility spillover effects among financial assets. The new model has desirable properties…
The collateral choice option allows a collateral-posting party the opportunity to change the type of security in which the collateral is deposited. Due to non-zero collateral basis spreads, this optionality significantly impacts asset…
In this paper, we relax the power parameter of instantaneous variance and develop a new stochastic volatility plus jumps model that generalize the Heston model and 3/2 model as special cases. This model has two distinctive features. First,…
It is known that the implied volatility skew of FX options demonstrates a stochastic behavior which is called stochastic skew. In this paper we create stochastic skew by assuming the spot/instantaneous variance correlation to be stochastic.…
Recent years have seen an increased level of interest in pricing equity options under a stochastic volatility model such as the Heston model. Often, simulating a Heston model is difficult, as a standard finite difference scheme may lead to…
We provide explicit small-time formulae for the at-the-money implied volatility, skew and curvature in a large class of models, including rough volatility models and their multi-factor versions. Our general setup encompasses both European…
This paper examines the volatility and covariance dynamics of cash and futures contracts that underlie the Optimal Hedge Ratio (OHR) across different hedging time horizons. We examine whether hedge ratios calculated over a short term…
We develop a semi-static framework for the variance-optimal hedging of multi-asset derivatives exposed to correlation and covariance risk. The approach combines continuous-time dynamic trading in the underlying assets with a static…
This paper introduces one new multivariate volatility model that can accommodate an appropriately defined network structure based on low-frequency and high-frequency data. The model reduces the number of unknown parameters and the…
This paper focuses on a dynamic multi-asset mean-variance portfolio selection problem under model uncertainty. We develop a continuous time framework for taking into account ambiguity aversion about both expected return rates and…
We present a new volatility model, simple to implement, that includes a leverage effect whose return-volatility correlation function fits to empirical observations. This model is able to capture both the "retarded effect" induced by the…
In Gatheral et al. 2018, first posted in 2014, volatility is characterized by fractional behavior with a Hurst exponent $H < 0.5$, challenging traditional views of volatility dynamics. Gatheral et al. demonstrated this using realized…