Discussion Paper Series 2024-E-6

A Survey of Rough Volatility

Kazuhiro Hiraki, Yuji Shinozaki

Volatility, which is a measure of asset price uncertainty, is an important subject of finance research. In recent years, a growing number of studies have suggested that volatility is rough, namely that volatility fluctuates more wildly than is conventionally recognized, making rough volatility a new trend in volatility research. This strand of literature includes empirical analysis of the volatility observable in high-frequency trading data and derivatives markets, theoretical studies that clarify the necessity of rough volatility models, and their applications to derivative pricing. There have also been studies that explore the mechanism giving rise to roughness. In this paper, we provide an overview of the literature and the history of developments in the study of volatility from three perspectives--(1) time-series analysis of asset price fluctuations, (2) derivative pricing and risk management, and (3) the economic mechanism that gives rise to rough volatility--thereby clarifying the current position and prospects of rough volatility research. In particular, referring to issues in financial practice and relationship between volatility research and economics, we emphasize the importance of cross-disciplinary studies with volatility as a nexus.

Keywords: Historical volatility; Implied volatility; Market microstructure; Highfrequency trading; Derivative pricing; Risk management; Market forecast


Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.

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