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Weak error estimates for rough volatility models

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  • Peter K. Friz
  • William Salkeld
  • Thomas Wagenhofer

Abstract

We consider a class of stochastic processes with rough stochastic volatility, examples of which include the rough Bergomi and rough Stein-Stein model, that have gained considerable importance in quantitative finance. A basic question for such (non-Markovian) models concerns efficient numerical schemes. While strong rates are well understood (order $H$), we tackle here the intricate question of weak rates. Our main result asserts that the weak rate, for a reasonably large class of test function, is essentially of order $\min \{ 3H+\tfrac12, 1 \}$ where $H \in (0,1/2]$ is the Hurst parameter of the fractional Brownian motion that underlies the rough volatility process. Interestingly, the phase transition at $H=1/6$ is related to the correlation between the two driving factors, and thus gives additional meaning to a quantity already of central importance in stochastic volatility modelling.Our results are complemented by a lower bound which show that the obtained weak rate is indeed optimal.

Suggested Citation

  • Peter K. Friz & William Salkeld & Thomas Wagenhofer, 2022. "Weak error estimates for rough volatility models," Papers 2212.01591, arXiv.org, revised Aug 2024.
    • Handle: RePEc:arx:papers:2212.01591
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    File URL: http://arxiv.org/pdf/2212.01591
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    References listed on IDEAS

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    1. Eduardo Abi Jaber, 2022. "The characteristic function of Gaussian stochastic volatility models: an analytic expression," Post-Print hal-02946146, HAL.
    2. Jim Gatheral & Thibault Jaisson & Mathieu Rosenbaum, 2018. "Volatility is rough," Quantitative Finance, Taylor & Francis Journals, vol. 18(6), pages 933-949, June.
    3. 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.
    4. Masaaki Fukasawa, 2021. "Volatility has to be rough," Quantitative Finance, Taylor & Francis Journals, vol. 21(1), pages 1-8, January.
    5. Christian Bayer & Masaaki Fukasawa & Shonosuke Nakahara, 2022. "On the weak convergence rate in the discretization of rough volatility models," Papers 2203.02943, arXiv.org.
    6. Christian Bayer & Peter Friz & Jim Gatheral, 2016. "Pricing under rough volatility," Quantitative Finance, Taylor & Francis Journals, vol. 16(6), pages 887-904, June.
    7. Eduardo Abi Jaber, 2022. "The characteristic function of Gaussian stochastic volatility models: an analytic expression," Working Papers hal-02946146, HAL.
    8. 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.
    9. Eduardo Abi Jaber, 2020. "The characteristic function of Gaussian stochastic volatility models: an analytic expression," Papers 2009.10972, arXiv.org, revised May 2022.
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    Cited by:

    1. Ofelia Bonesini & Antoine Jacquier & Alexandre Pannier, 2023. "Rough volatility, path-dependent PDEs and weak rates of convergence," Papers 2304.03042, arXiv.org.
    2. Ofelia Bonesini & Giorgia Callegaro & Martino Grasselli & Gilles Pag`es, 2023. "From elephant to goldfish (and back): memory in stochastic Volterra processes," Papers 2306.02708, arXiv.org, revised Sep 2023.

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