June 15, 2016 @ 5:00 pm – 6:30 pm
Auditorio Paraninfo. Claustro San Agustín. Universidad de Cartagena

Cross-Dependent Volatility
Julien Guyon (Bloomberg L.P.)
Local volatilities in multi-asset models typically have no cross-asset dependency. In this talk, we propose a general framework for pricing and hedging derivatives in cross-dependent volatility (CDV) models, i.e., multi-asset models in which the volatility of each asset is a function of not only its current or past levels, but also those of the other assets. For instance, CDV models can capture that stock volatilities are driven by an index level, or recent index returns. We explain how to build all the CDV models that are calibrated to all the asset smiles, solving in particular the longstanding smiles calibration problem for the “cross-aware” multidimensional local volatility model. CDV models are rich enough to be simultaneously calibrated to other instruments, such as basket smiles, and we show that the model can fit a basket smile either by means of a correlation skew, like in the classical “cross-blind” multi-asset local volatility model, or using only the cross-dependency of volatilities itself, in a correlation-skew-free model, thus proving that steep basket skews are not necessarily a sign of correlation skew. We can even calibrate CDV models to basket smiles using correlation skews that are opposite to the ones generated by the classical cross-blind models, e.g., calibrate to large negative index skews while requiring that stocks are less correlated when the market is down. All the calibration procedures use the particle method; the calibration of the implied “local in basket” CDV uses a novel fixed point-compound particle method. Numerical results in the case of the FX smile triangle problem illustrate our results and the capabilities of CDV models.
Keywords: Option pricing, multi-asset models, cross-dependent volatility, correlation skew, smile calibration, basket options, particle method.

Rough Volatility: From Microstructural Foundations to Smile
Mathieu Rosenbaum (Universite Pierre-et-Marie-Curie)
It has been recently shown that rough volatility models reproduce very well the statistical properties of low frequency financial data. In such models, the volatility process is driven by a fractional Brownian motion with Hurst parameter of order 0.1. The goal of this talk is first to explain how such fractional dynamics can be obtained from the behaviour of market participants at the microstructural scales. Using limit theorems for Hawkes processes, we show that a rough volatility naturally arises in the presence of high frequency trading combined with metaorders splitting. Then we will demonstrate that such result enables us to derive an efficient method to compute the smile in rough volatility models. This is joint work with Omar El Euch, Masaaki Fukasawa, Jim Gatheral and Thibault Jaisson.

Hedging of covered options with linear price impact and gamma constraint
Bruno Bouchard (Universite Paris-Dauphine)
Within a financial model with linear price impact, we study the problem of hedging a covered European option under gamma constraint. Using stochastic target and partial differential equation smoothing techniques, we prove that the super-replication price is the viscosity solution of a fully non-linear parabolic equation. As a by-product, we show how ε-optimal strategies can be constructed. A numerical resolution scheme is proposed.

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