Multi-factor approximation of rough volatility models

Understand

Rough volatility models are very appealing because of their remarkable fit of both historical and implied volatilities.

• However, due to the non-Markovian and non-semimartingale nature of the volatility process, there is no simple way to simulate efficiently such models, which makes risk management of derivatives an intricate task.
• In this paper, we design tractable multi-factor stochastic volatility models approximating rough volatility models and enjoying a Markovian structure.
• Furthermore, we apply our procedure to the specific case of the rough Heston model.