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Regime switching rough Heston model
Author(s) -
Alfeus Mesias,
Overbeck Ludger,
Schlögl Erik
Publication year - 2019
Publication title -
journal of futures markets
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.88
H-Index - 55
eISSN - 1096-9934
pISSN - 0270-7314
DOI - 10.1002/fut.21993
Subject(s) - stylized fact , skew , monte carlo method , volatility (finance) , heston model , stochastic volatility , hurst exponent , econometrics , statistical physics , term (time) , mathematics , computer science , economics , sabr volatility model , physics , statistics , keynesian economics , telecommunications , quantum mechanics
This model combines two important stylized features of volatility, the rough behavior consistent with a Hurst parameter less than 0.5 , and the regime switching property consistent with more long‐term economic considerations. It is nevertheless highly tractable in the sense of semianalytic formulae for European options, and permits a partial Monte Carlo method of similar computational speed as the semianalytic formula (at an appropriate number of Monte Carlo simulations). While option prices are relatively insensitive to the choice of Hurst parameter, introducing rough volatility allows for a better fit to the at‐the‐money skew.