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A rough SABR formula

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  • Masaaki Fukasawa
  • Jim Gatheral

Abstract

Following an approach originally suggested by Balland in the context of the SABR model, we derive an ODE that is satisfied by normalized volatility smiles for short maturities under a rough volatility extension of the SABR model that extends also the rough Bergomi model. We solve this ODE numerically and further present a very accurate approximation to the numerical solution that we dub the rough SABR formula.

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  • Masaaki Fukasawa & Jim Gatheral, 2021. "A rough SABR formula," Papers 2105.05359, arXiv.org.
    • Handle: RePEc:arx:papers:2105.05359
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    File URL: http://arxiv.org/pdf/2105.05359
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    References listed on IDEAS

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    1. H. Berestycki & J. Busca & I. Florent, 2002. "Asymptotics and calibration of local volatility models," Quantitative Finance, Taylor & Francis Journals, vol. 2(1), pages 61-69.
    2. Elisa Alòs & Jorge León & Josep Vives, 2007. "On the short-time behavior of the implied volatility for jump-diffusion models with stochastic volatility," Finance and Stochastics, Springer, vol. 11(4), pages 571-589, October.
    3. Masaaki Fukasawa, 2017. "Short-time at-the-money skew and rough fractional volatility," Quantitative Finance, Taylor & Francis Journals, vol. 17(2), pages 189-198, February.
    4. Mikkel Bennedsen & Asger Lunde & Mikko S. Pakkanen, 2015. "Hybrid scheme for Brownian semistationary processes," Papers 1507.03004, arXiv.org, revised May 2017.
    5. Masaaki Fukasawa & Blanka Horvath & Peter Tankov, 2021. "Hedging under rough volatility," Papers 2105.04073, arXiv.org.
    6. Mikkel Bennedsen & Asger Lunde & Mikko S. Pakkanen, 2017. "Hybrid scheme for Brownian semistationary processes," Finance and Stochastics, Springer, vol. 21(4), pages 931-965, October.
    7. Blanka Horvath & Josef Teichmann & Zan Zuric, 2021. "Deep Hedging under Rough Volatility," Papers 2102.01962, arXiv.org.
    8. Omar El Euch & Masaaki Fukasawa & Jim Gatheral & Mathieu Rosenbaum, 2018. "Short-term at-the-money asymptotics under stochastic volatility models," Papers 1801.08675, arXiv.org, revised Mar 2019.
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    Cited by:

    1. Siow Woon Jeng & Adem Kiliçman, 2021. "SPX Calibration of Option Approximations under Rough Heston Model," Mathematics, MDPI, vol. 9(21), pages 1-11, October.

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