Short-time expansion of characteristic functions in a rough volatility setting with applications

Carsten H. Chong, Vi Ktor Todorov

Research output: Contribution to journalJournal Articlepeer-review

2 Citations (Scopus)

Abstract

We derive a higher-order asymptotic expansion of the conditional characteristic function of the increment of an Itô semimartingale over a shrinking time interval. The spot characteristics of the Itô semimartingale are allowed to have dynamics of general form. In particular, their paths can be rough, that is, exhibit local behavior like that of a fractional Brownian motion, while at the same time have jumps with arbitrary degree of activity. The expansion result shows the distinct roles played by the different features of the spot characteristics dynamics. As an application of our result, we construct a nonparametric estimator of the Hurst parameter of the diffusive volatility process from portfolios of short-dated options written on an underlying asset.

Original languageEnglish
Pages (from-to)1789-1810
Number of pages22
JournalBernoulli
Volume31
Issue number3
DOIs
Publication statusPublished - Aug 2025

Bibliographical note

Publisher Copyright:
© 2025 ISI/BS.

Keywords

  • Asymptotic expansion
  • characteristic function
  • fractional Brownian motion
  • Hurst parameter
  • infinite variation jumps
  • Itô semimartingale
  • options
  • rough volatility

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