Power law in Sandwiched Volterra Volatility model
Volume 11, Issue 2 (2024), pp. 169–194
Pub. online: 23 January 2024
Type: Research Article
Open Access
Open Access
Received
2 November 2023
2 November 2023
Revised
11 January 2024
11 January 2024
Accepted
12 January 2024
12 January 2024
Published
23 January 2024
23 January 2024
Abstract
The paper presents an analytical proof demonstrating that the Sandwiched Volterra Volatility (SVV) model is able to reproduce the power-law behavior of the at-the-money implied volatility skew, provided the correct choice of the Volterra kernel. To obtain this result, the second-order Malliavin differentiability of the volatility process is assessed and the conditions that lead to explosive behavior in the Malliavin derivative are investigated. As a supplementary result, a general Malliavin product rule is proved.
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