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Activity Number: 17 - Statistics in Finance
Type: Topic Contributed
Date/Time: Sunday, August 7, 2022 : 2:00 PM to 3:50 PM
Sponsor: Business and Economic Statistics Section
Abstract #322749
Title: Rough Volatility: Fact or Artefact?
Author(s): Purba Das*
Companies: University of Oxford
Keywords: realized volatility; microstructure noise; fractional Brownian motion; normalized p-th variation; Hurst exponent; roughness estimator

We investigate the statistical evidence for the use of ‘rough’ fractional processes with Hurst exponent H < 0.5 for the modelling of volatility of financial assets, using a model-free approach. We introduce a non-parametric method for estimating the roughness of a function and discuss the consistency of the estimator in a pathwise setting. We then apply this method to estimate the roughness of realized volatility signals based on high-frequency observations. Detailed numerical experiments based on stochastic volatility models show that, even when the instantaneous volatility has diffusive dynamics with the same roughness as BM, the realized volatility exhibits rough behaviour corresponding to a Hurst exponent < < 0.5, which suggests that the origin of the roughness observed in realized volatility time-series lies in the microstructure noise rather than the volatility process itself. Comparison of roughness estimates for realized and instantaneous volatility in fractional volatility models with different values of Hurst exponent shows that whatever the value of H, realized volatility always exhibits `rough' behaviour with an apparent Hurst index H^< 0.5.

Authors who are presenting talks have a * after their name.

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