An Intuitive Introduction to Fractional and Rough Volatilities
Abstract
:1. Introduction
2. Fractional Brownian Motion
3. Malliavin Calculus for Brownian Motion
4. Stochastic Volatility Models and the Implied Volatility
4.1. The Black-Scholes Model and the Concept of Implied Volatility
4.2. Stochastic Volatility Models
- The Heston model, where the volatility satisfies
- The SABR model, with
5. Intuition behind Fractional Volatility Models
5.1. An Expansion for the Implied Volatility
5.1.1. The Deterministic Case
5.1.2. The Stochastic Volatility Case with
5.1.3. The Stochastic Volatility Case with
5.2. The Clark Ocone Formula for the Integrated Variance
6. Some Analytical Results
6.1. An Extension of the Hull and White Formula
6.2. The Derivative of the Implied Volatility
- 1.
- 2.
7. A Simple Fractional Model
- an mfBergomi model with , , , and and
- an rBergomi model with , , and .
8. Conclusions
Author Contributions
Funding
Institutional Review Board Statement
Informed Consent Statement
Data Availability Statement
Acknowledgments
Conflicts of Interest
References
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Alòs, E.; León, J.A. An Intuitive Introduction to Fractional and Rough Volatilities. Mathematics 2021, 9, 994. https://doi.org/10.3390/math9090994
Alòs E, León JA. An Intuitive Introduction to Fractional and Rough Volatilities. Mathematics. 2021; 9(9):994. https://doi.org/10.3390/math9090994
Chicago/Turabian StyleAlòs, Elisa, and Jorge A. León. 2021. "An Intuitive Introduction to Fractional and Rough Volatilities" Mathematics 9, no. 9: 994. https://doi.org/10.3390/math9090994