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arXiv · 2403.11897

Risk premium and rough volatility

Ofelia Bonesini·Antoine Jacquier·Aitor Muguruza
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Abstract

One the one hand, rough volatility has been shown to provide a consistent framework to capture the properties of stock price dynamics both under the historical measure and for pricing purposes. On the other hand, market price of volatility risk is a well-studied object in Financial Economics, and empirical estimates show it to be stochastic rather than deterministic. Starting from a rough volatility model under the historical measure, we take up this challenge and provide an analysis of the impact of such a non-deterministic risk for pricing purposes.

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Ofelia Bonesini, Antoine Jacquier, Aitor Muguruza. 2024-03-18. Risk premium and rough volatility. https://arxiv.org/abs/2403.11897

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