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Pseudo rough vol-of-vol through Markovian approximation

Author

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  • Henrique Guerreiro
  • João Guerra

Abstract

We discuss a possible framework for a (pseudo) rough vol-of-vol model through a multi-factor Markovian approximation of the vol-ofvol process. We identify a key martingale condition which may allow to express the VIX in terms of the solution of a certain Riccati ordinary dierential equation. We derive this equation and provide sucient conditions for the existence of solutions. We also provide some partial results regarding the martingale condition. In particular, we verify a local martingale condition.

Suggested Citation

  • Henrique Guerreiro & João Guerra, 2024. "Pseudo rough vol-of-vol through Markovian approximation," Working Papers REM 2024/0310, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    • Handle: RePEc:ise:remwps:wp03102024
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    File URL: https://rem.rc.iseg.ulisboa.pt/wps/pdf/REM_WP_0310_2024.pdf
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    References listed on IDEAS

    as
    1. Giulia Livieri & Saad Mouti & Andrea Pallavicini & Mathieu Rosenbaum, 2018. "Rough volatility: Evidence from option prices," IISE Transactions, Taylor & Francis Journals, vol. 50(9), pages 767-776, September.
    2. Masaaki Fukasawa, 2011. "Asymptotic analysis for stochastic volatility: martingale expansion," Finance and Stochastics, Springer, vol. 15(4), pages 635-654, December.
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