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Article Dans Une Revue SIAM Journal on Financial Mathematics Année : 2019

Multi-factor approximation of rough volatility models

Omar El Euch
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Résumé

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 simulate efficiently such models, which makes risk management of derivatives an intricate task. In this paper, we design tractable multi-factor stochastic volatility models approximating rough volatility models and enjoying a Markovian structure. Furthermore, we apply our procedure to the specific case of the rough Heston model. This in turn enables us to derive a numerical method for solving fractional Riccati equations appearing in the characteristic function of the log-price in this setting.
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Dates et versions

hal-01697117 , version 1 (31-01-2018)
hal-01697117 , version 2 (28-03-2018)
hal-01697117 , version 3 (10-04-2018)

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Eduardo Abi Jaber, Omar El Euch. Multi-factor approximation of rough volatility models. SIAM Journal on Financial Mathematics, 2019. ⟨hal-01697117v3⟩
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