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arXiv · 2002.09215

Volatility has to be rough

Masaaki Fukasawa
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Abstract

First, we give an asymptotic expansion of short-dated at-the-money implied volatility that refines the preceding works and proves in particular that non-rough volatility models are inconsistent to a power law of volatility skew. Second, we show that given a power law of volatility skew in an option market, a continuous price dynamics of the underlying asset with non-rough volatility admits an arbitrage opportunity. The volatility therefore has to be rough in a viable market of the underlying asset of which the volatility skew obeys a power law.

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Masaaki Fukasawa. 2020-02-21. Volatility has to be rough. https://arxiv.org/abs/2002.09215

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