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The Zumbach effect under rough Heston

Author

Listed:
  • Omar El Euch
  • Jim Gatheral
  • Radoš Radoičić
  • Mathieu Rosenbaum

Abstract

Previous literature has identified an effect, dubbed the Zumbach effect, that is nonzero empirically but conjectured to be zero in any conventional stochastic volatility model. Essentially this effect corresponds to the property that past squared returns forecast future volatilities better than past volatilities forecast future squared returns. We provide explicit computations of the Zumbach effect under rough Heston and show that they are consistent with empirical estimates. In agreement with previous conjectures however, the Zumbach effect is found to be negligible in the classical Heston model.

Suggested Citation

  • Omar El Euch & Jim Gatheral & Radoš Radoičić & Mathieu Rosenbaum, 2020. "The Zumbach effect under rough Heston," Quantitative Finance, Taylor & Francis Journals, vol. 20(2), pages 235-241, February.
    • Handle: RePEc:taf:quantf:v:20:y:2020:i:2:p:235-241
    DOI: 10.1080/14697688.2019.1658889
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    Cited by:

    1. Giulia Di Nunno & Kk{e}stutis Kubilius & Yuliya Mishura & Anton Yurchenko-Tytarenko, 2023. "From constant to rough: A survey of continuous volatility modeling," Papers 2309.01033, arXiv.org, revised Sep 2023.
    2. Antoine Fosset & Jean-Philippe Bouchaud & Michael Benzaquen, 2020. "Non-parametric Estimation of Quadratic Hawkes Processes for Order Book Events," Working Papers hal-02998555, HAL.
    3. Antoine Fosset & Jean-Philippe Bouchaud & Michael Benzaquen, 2021. "Non-parametric Estimation of Quadratic Hawkes Processes for Order Book Events," Post-Print hal-02998555, HAL.
    4. Antoine Fosset & Jean-Philippe Bouchaud & Michael Benzaquen, 2020. "Non-parametric Estimation of Quadratic Hawkes Processes for Order Book Events," Papers 2005.05730, arXiv.org.

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