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Signature volatility models: pricing and hedging with Fourier

Author

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  • Eduardo Abi Jaber

    (CMAP - Centre de Mathématiques Appliquées de l'Ecole polytechnique - Inria - Institut National de Recherche en Informatique et en Automatique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique)

  • Louis-Amand Gérard

    (UP1 - Université Paris 1 Panthéon-Sorbonne)

Abstract

We consider a stochastic volatility model where the dynamics of the volatility are given by a possibly infinite linear combination of the elements of the time extended signature of a Brownian motion. First, we show that the model is remarkably universal, as it includes, but is not limited to, the celebrated Stein-Stein, Bergomi, and Heston models, together with some path-dependent variants. Second, we derive the joint characteristic functional of the log-price and integrated variance provided that some infinitedimensional extended tensor algebra valued Riccati equation admits a solution. This allows us to price and (quadratically) hedge certain European and path-dependent options using Fourier inversion techniques. We highlight the efficiency and accuracy of these Fourier techniques in a comprehensive numerical study.

Suggested Citation

  • Eduardo Abi Jaber & Louis-Amand Gérard, 2025. "Signature volatility models: pricing and hedging with Fourier," Post-Print hal-04435238, HAL.
    • Handle: RePEc:hal:journl:hal-04435238
    DOI: 10.1137/24M1636952
    Note: View the original document on HAL open archive server: https://hal.science/hal-04435238v2
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    References listed on IDEAS

    as
    1. Stein, Elias M & Stein, Jeremy C, 1991. "Stock Price Distributions with Stochastic Volatility: An Analytic Approach," The Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 727-752.
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    3. Eduardo Abi Jaber, 2022. "The characteristic function of Gaussian stochastic volatility models: an analytic expression," Working Papers hal-02946146, HAL.
    4. Eduardo Abi Jaber, 2022. "The characteristic function of Gaussian stochastic volatility models: an analytic expression," Post-Print hal-02946146, HAL.
    5. Alan L. Lewis, 2001. "A Simple Option Formula for General Jump-Diffusion and other Exponential Levy Processes," Related articles explevy, Finance Press.
    6. Fermanian, Adeline, 2021. "Embedding and learning with signatures," Computational Statistics & Data Analysis, Elsevier, vol. 157(C).
    7. Eduardo Abi Jaber, 2022. "The characteristic function of Gaussian stochastic volatility models: an analytic expression," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-02946146, HAL.
    8. Eduardo Abi Jaber, 2020. "The characteristic function of Gaussian stochastic volatility models: an analytic expression," Papers 2009.10972, arXiv.org, revised May 2022.
    9. Jean-Philippe Bouchaud & Yuval Gefen & Marc Potters & Matthieu Wyart, 2003. "Fluctuations and response in financial markets: the subtle nature of `random' price changes," Papers cond-mat/0307332, arXiv.org, revised Aug 2003.
    10. Eduardo Abi Jaber, 2022. "The characteristic function of Gaussian stochastic volatility models: an analytic expression," Finance and Stochastics, Springer, vol. 26(4), pages 733-769, October.
    11. Heston, Steven L, 1993. "A Closed-Form Solution for Options with Stochastic Volatility with Applications to Bond and Currency Options," The Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 327-343.
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    13. Omar El Euch & Mathieu Rosenbaum, 2019. "The characteristic function of rough Heston models," Mathematical Finance, Wiley Blackwell, vol. 29(1), pages 3-38, January.
    14. Eduardo Abi Jaber & Shaun & Li & Xuyang Lin, 2024. "Fourier-Laplace transforms in polynomial Ornstein-Uhlenbeck volatility models," Papers 2405.02170, arXiv.org.
    15. Terry Lyons, 2014. "Rough paths, Signatures and the modelling of functions on streams," Papers 1405.4537, arXiv.org.
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