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Title:  Fractional stochastic volatility models: approximation, calibration and hedging 
Author(s):  Zhao, Qi 
Director of Research:  Chronopoulou, Alexandra 
Doctoral Committee Chair(s):  Feng, Liming 
Doctoral Committee Member(s):  Sreenivas, Ramavarapu; Sirignano, Justin 
Department / Program:  Industrial&Enterprise Sys Eng 
Discipline:  Industrial Engineering 
Degree Granting Institution:  University of Illinois at UrbanaChampaign 
Degree:  Ph.D. 
Genre:  Dissertation 
Subject(s):  Fractional Stochastic Volatility
Hedging Calibration Weak Convergence 
Abstract:  The area of modeling stochastic volatility using continuous time models has a long history and is always an interesting and vibrant area in financial mathematics, where the dynamic of the asset is a diffusion driven by Brownian motion and the dynamic of the volatility is associated with a diffusion driven also by another Brownian motion, instead of a fixed constant as in BlackScholes model. However recent works have pointed out that there are some observations that the semimartinagales or Markovian models cannot explain, for example volatility persistence or the roughness of the sample paths of volatilities. And that is when the fractional stochastic volatility models are introduced. Our work about fractional stochastic volatility models mainly covers three different directions: hedging, calibration and approximation. In chapter 3, we propose a deltahedging strategy for a long memory stochastic volatility model (LMSV). This is a model in which the volatility is driven by a fractional OrnsteinUhlenbeck process with Hurst Index H greater than 1/2. We need to notice that perfect hedging cannot be achieved in nonMarkovian fractional volatility framework, and thus we can only study imperfect deltahedging strategy. We first proved the existence of this strategy by establishing the differentiability of the option price with respect to the underlying asset price. We also compute the socalled hedging bias, i.e. the difference between the BlackScholes Delta and the LMSV Delta, and we determine when a Europeantype option is overhedged or underhedged. In chapter 4, to address the concern whether roughness can only be observed in the high frequency data, we first propose a new volatility proxy framework using low frequency cumulative option trading entries. Upon that framework we estimate the Hurst Index of the volatility and verify that the volatility exhibits very rough behavior even in the low frequency (daily) settings, which corroborates that roughness should always be taken into consideration when modeling the volatility for option pricing and calibration. In the case of pricing option in the long run we observe that the hurst number varies largely, suggesting the hurst number is a local parameter and is not appropriate to be taken as a constant in the long setting. In chapter 5, we consider the volatility model driven by fractional OrnsteinUnlenbeck process, with Hurst index H less than 1/2. We propose a point process approximation scheme to both the volatility process and the asset price process, and we first prove a Donsker type theorem for the convergence to fractional OrnsteinUhlenbeck process. With that theorem we prove the weak convergence of the scheme to the logprice process. We also take into account the correlation between the volatility and the stock process, which is also termed as leverage effect. This work will be conducted with respect to Skorohod topology and we will not have interpolating term. The result can be generalized to all point process with jumps consisting of bounded random variables. 
Issue Date:  20210711 
Type:  Thesis 
URI:  http://hdl.handle.net/2142/113139 
Rights Information:  Copyright 2021 Qi Zhao 
Date Available in IDEALS:  20220112 
Date Deposited:  202108 
This item appears in the following Collection(s)

Dissertations and Theses  Industrial and Enterprise Systems Engineering

Graduate Dissertations and Theses at Illinois
Graduate Theses and Dissertations at Illinois