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Large deviation principle for Volterra type fractional stochastic volatility models

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  • Archil Gulisashvili

Abstract

We study fractional stochastic volatility models in which the volatility process is a positive continuous function $\sigma$ of a continuous Gaussian process $\widehat{B}$. Forde and Zhang established a large deviation principle for the log-price process in such a model under the assumptions that the function $\sigma$ is globally H\"{o}lder-continuous and the process $\widehat{B}$ is fractional Brownian motion. In the present paper, we prove a similar small-noise large deviation principle under weaker restrictions on $\sigma$ and $\widehat{B}$. We assume that $\sigma$ satisfies a mild local regularity condition, while the process $\widehat{B}$ is a Volterra type Gaussian process. Under an additional assumption of the self-similarity of the process $\widehat{B}$, we derive a large deviation principle in the small-time regime. As an application, we obtain asymptotic formulas for binary options, call and put pricing functions, and the implied volatility in certain mixed regimes.

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  • Archil Gulisashvili, 2017. "Large deviation principle for Volterra type fractional stochastic volatility models," Papers 1710.10711, arXiv.org, revised Aug 2018.
  • Handle: RePEc:arx:papers:1710.10711
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    References listed on IDEAS

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    Cited by:

    1. Archil Gulisashvili, 2020. "Time-inhomogeneous Gaussian stochastic volatility models: Large deviations and super roughness," Papers 2002.05143, arXiv.org, revised Dec 2020.
    2. Christian Bayer & Peter K. Friz & Paul Gassiat & Jorg Martin & Benjamin Stemper, 2020. "A regularity structure for rough volatility," Mathematical Finance, Wiley Blackwell, vol. 30(3), pages 782-832, July.
    3. Archil Gulisashvili, 2020. "Large deviation principles for stochastic volatility models with reflection and three faces of the Stein and Stein model," Papers 2006.15431, arXiv.org.
    4. Archil Gulisashvili, 2022. "Multivariate Stochastic Volatility Models and Large Deviation Principles," Papers 2203.09015, arXiv.org, revised Nov 2022.
    5. Peter K. Friz & Thomas Wagenhofer, 2023. "Reconstructing volatility: Pricing of index options under rough volatility," Mathematical Finance, Wiley Blackwell, vol. 33(1), pages 19-40, January.
    6. Florian Bourgey & Stefano De Marco & Peter K. Friz & Paolo Pigato, 2023. "Local volatility under rough volatility," Mathematical Finance, Wiley Blackwell, vol. 33(4), pages 1119-1145, October.
    7. Giacomo Giorgio & Barbara Pacchiarotti & Paolo Pigato, 2023. "Short-Time Asymptotics for Non-Self-Similar Stochastic Volatility Models," Applied Mathematical Finance, Taylor & Francis Journals, vol. 30(3), pages 123-152, May.
    8. Eduardo Abi Jaber, 2022. "The Laplace transform of the integrated Volterra Wishart process," Mathematical Finance, Wiley Blackwell, vol. 32(1), pages 309-348, January.
    9. Antoine Jacquier & Alexandre Pannier, 2020. "Large and moderate deviations for stochastic Volterra systems," Papers 2004.10571, arXiv.org, revised Apr 2022.
    10. Peter K. Friz & Thomas Wagenhofer, 2022. "Reconstructing Volatility: Pricing of Index Options under Rough Volatility," Papers 2212.07817, arXiv.org.
    11. Blanka Horvath & Antoine Jacquier & Aitor Muguruza & Andreas Sojmark, 2017. "Functional central limit theorems for rough volatility," Papers 1711.03078, arXiv.org, revised Nov 2023.
    12. Jacquier, Antoine & Pannier, Alexandre, 2022. "Large and moderate deviations for stochastic Volterra systems," Stochastic Processes and their Applications, Elsevier, vol. 149(C), pages 142-187.
    13. Gulisashvili, Archil, 2020. "Gaussian stochastic volatility models: Scaling regimes, large deviations, and moment explosions," Stochastic Processes and their Applications, Elsevier, vol. 130(6), pages 3648-3686.
    14. Gulisashvili, Archil, 2021. "Time-inhomogeneous Gaussian stochastic volatility models: Large deviations and super roughness," Stochastic Processes and their Applications, Elsevier, vol. 139(C), pages 37-79.
    15. Gerhold, Stefan & Gerstenecker, Christoph & Gulisashvili, Archil, 2021. "Large deviations for fractional volatility models with non-Gaussian volatility driver," Stochastic Processes and their Applications, Elsevier, vol. 142(C), pages 580-600.
    16. Eduardo Abi Jaber & Shaun & Li, 2024. "Volatility models in practice: Rough, Path-dependent or Markovian?," Papers 2401.03345, arXiv.org.
    17. Miriana Cellupica & Barbara Pacchiarotti, 2021. "Pathwise Asymptotics for Volterra Type Stochastic Volatility Models," Journal of Theoretical Probability, Springer, vol. 34(2), pages 682-727, June.

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