The pricing of SSE 50 ETF options based on asymmetric jump rough stochastic volatility model

LIU Xiangdong, HONG Shaopeng

Systems Engineering - Theory & Practice ›› 2023, Vol. 43 ›› Issue (2) : 350-370.

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Systems Engineering - Theory & Practice ›› 2023, Vol. 43 ›› Issue (2) : 350-370. DOI: 10.12011/SETP2022-0430

The pricing of SSE 50 ETF options based on asymmetric jump rough stochastic volatility model

  • LIU Xiangdong, HONG Shaopeng
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Abstract

Based on the asymmetric jumps in asset prices and the rough in the asset volatility, this paper proposesthe the rough Heston model with asymmetric jump (rHeston-AEDJ) and derives the characteristic functions in the risk-neutral measure. Due to the non-Markovian and non-semimartingale of the model, it cannot be approximated using the Euler method. A hybrid simulation approach is used to approximate the rough Heston model with asymmetric jump and can solve the pricing problem of exotic options under rough volatility with poisson jump. Under the risk-neutral measure, the quasi-closed function of the Euclidean option is derived based on Fourier-SINC. The results of the empirical study show that there is a jump in the price of Shanghai Stock Exchange (SSE) 50 exchange traded fund (ETF) and the volatility Hurst index is much less than 1/2, i.e., there is roughness in the volatility. The pricing experiment of SSE 50 ETF options based on the quasi-closed function finds that the proposed rHeston-AEDJ model has good pricing accuracy both inside and outside the sample. The findings of the study are of great practical significance and application value to the pricing and accurate risk management of domestic and foreign option products.

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rough volatility model / asymmetric exponential distribution / compound Poisson jump / Fourier-SINC / SSE 50 ETF option pricing

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LIU Xiangdong , HONG Shaopeng. The pricing of SSE 50 ETF options based on asymmetric jump rough stochastic volatility model. Systems Engineering - Theory & Practice, 2023, 43(2): 350-370 https://doi.org/10.12011/SETP2022-0430

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Funding

National Natural Science Foundation of China (71471075); The Fundamental Research Funds for the Central Universities (19JNLH09); Key Project of Industry University Research Innovation Fund of Science and Technology Development Center of the Ministry of Education (2019J01017); Key Platforms and Scientific Research Projects in Guangdong Province, Provincial Innovation Team Project (2016WCXTD004)
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