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Regime switching rough Heston model

Author

Listed:
  • Mesias Alfeus
  • Ludger Overbeck
  • Erik Schlögl

Abstract

This model combines two important stylized features of volatility, the rough behavior consistent with a Hurst parameter less than 0.5, and the regime switching property consistent with more long‐term economic considerations. It is nevertheless highly tractable in the sense of semianalytic formulae for European options, and permits a partial Monte Carlo method of similar computational speed as the semianalytic formula (at an appropriate number of Monte Carlo simulations). While option prices are relatively insensitive to the choice of Hurst parameter, introducing rough volatility allows for a better fit to the at‐the‐money skew.

Suggested Citation

  • Mesias Alfeus & Ludger Overbeck & Erik Schlögl, 2019. "Regime switching rough Heston model," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(5), pages 538-552, May.
  • Handle: RePEc:wly:jfutmk:v:39:y:2019:i:5:p:538-552
    DOI: 10.1002/fut.21993
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    References listed on IDEAS

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    Cited by:

    1. Liang Wang & Weixuan Xia, 2022. "Power‐type derivatives for rough volatility with jumps," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(7), pages 1369-1406, July.
    2. Mesias Alfeus, 2019. "Stochastic Modelling of New Phenomena in Financial Markets," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2019.
    3. repec:uts:finphd:41 is not listed on IDEAS
    4. Ackermann, Julia & Kruse, Thomas & Overbeck, Ludger, 2022. "Inhomogeneous affine Volterra processes," Stochastic Processes and their Applications, Elsevier, vol. 150(C), pages 250-279.
    5. Alfeus, Mesias & Nikitopoulos, Christina Sklibosios, 2022. "Forecasting volatility in commodity markets with long-memory models," Journal of Commodity Markets, Elsevier, vol. 28(C).
    6. Yiru Xi & Hoi Ying Wong, 2021. "Discrete variance swap in a rough volatility economy," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(10), pages 1640-1654, October.
    7. Andrey Borisov, 2024. "Regime Tracking in Markets with Markov Switching," Mathematics, MDPI, vol. 12(3), pages 1-27, January.

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