Regime switching rough Heston model

Publication Type:
Journal Article
Journal of Futures Markets, 2019, 39 (5), pp. 538 - 552
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10.1002 fut.21993.pdfPublished Version1.25 MB
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© 2019 Wiley Periodicals, Inc. 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.
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