Seminar 217, Risk Management: Rough Heston model: Pricing, hedging and microstructural foundations

Seminar | November 7 | 11 a.m.-1 p.m. | 639 Evans Hall

 Speaker: Mathieu Rosenbaum, École Polytechnique

 Center for Risk Management Research

It has been recently shown that rough volatility models, where the volatility is driven by a fractional  Brownian motion with small Hurst parameter, provide very relevant dynamics in order to reproduce the  behavior of both historical and implied volatilities. However, due to the non-Markovian nature of the fractional Brownian motion, they raise new issues when it comes to the risk management of derivatives. Using an original link between nearly unstable Hawkes processes and rough volatility models, we explain in this talk how to price and hedge options in the rough version of the Heston model. This is joint work with Omar El Euch.