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arXiv · 2212.07817

Reconstructing Volatility: Pricing of Index Options under Rough Volatility

Peter K. Friz·Thomas Wagenhofer
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Abstract

In previous works Avellaneda et al. pioneered the pricing and hedging of index options - products highly sensitive to implied volatility and correlation assumptions - with large deviations methods, assuming local volatility dynamics for all components of the index. We here present an extension applicable to non-Markovian dynamics and in particular the case of rough volatility dynamics.

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Peter K. Friz, Thomas Wagenhofer. 2022-12-15. Reconstructing Volatility: Pricing of Index Options under Rough Volatility. https://arxiv.org/abs/2212.07817

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