Scholars publish paper on power-law relationship of skew-curvature in hybrid stochastic volatility models
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Òscar Burés and Josep Vives have published an academic paper studying the impact of hybrid dynamics with rough volatility and infinite variation Lévy jumps on the implied volatility skew and curvature of at-the-money options, confirming that such hybrid models also produce a power-law relationship between the two. By analyzing the leading terms of the short-time expansions of skew and curvature, the paper identifies the origin mechanism of the power-law behavior of skew and curvature in hybrid dynamic models, and provides numerical evidence for the rough Heston model with CGMY Lévy jumps. The relevant conclusions are of key significance for model design and calibration.
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- arXiv q-finPower-Law Relationship Between Skew and Curvature in Stochastic Volatility Models with Infinite Variation Lévy Jumps
This paper focuses on the impact of hybrid dynamics (rough volatility and infinite variation Lévy processes) on the implied volatility skew and curvature of at-the-money options. By analyzing the leading terms of their short-time expansions, the origin mechanism of the power-law behavior of skew and curvature can be determined from the hybrid dynamics model. The paper confirms that hybrid models also produce power-law relationships, and the relevant conclusions are crucial for model design and calibration. Numerical evidence for the rough Heston model with CGMY Lévy jumps is also provided.
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