The volatility paradigm that’s stirring up options pricing
‘Rough volatility’ models promise better pricing and hedging of options. But will they catch on?
There are whispers of a revolution in options pricing. But like many revolutions, it might take a few years to unfold.
A recent approach to volatility modelling dubbed “rough volatility” is gaining momentum across the quant community. At least nine firms – including US and European banks, market-makers and hedge funds – are known to be experimenting with models based on the technique, or plan to put them into production.
Rough volatility models are more accurate than their established cousins
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