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The fractional volatility model: No-arbitrage, leverage and risk measures

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  • R. Vilela Mendes
  • Maria Jo~ao Oliveira

Abstract

Based on a criterium of mathematical simplicity and consistency with empirical market data, a stochastic volatility model has been obtained with the volatility process driven by fractional noise. Depending on whether the stochasticity generators of log-price and volatility are independent or are the same, two versions of the model are obtained with different leverage behavior. Here, the no-arbitrage and incompleteness properties of the model are studied. Some risk measures are also discussed in this framework.

Suggested Citation

  • R. Vilela Mendes & Maria Jo~ao Oliveira, 2010. "The fractional volatility model: No-arbitrage, leverage and risk measures," Papers 1007.2817, arXiv.org.
    • Handle: RePEc:arx:papers:1007.2817
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    File URL: http://arxiv.org/pdf/1007.2817
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