Journal
FINANCE AND STOCHASTICS
Volume 22, Issue 2, Pages 241-280Publisher
SPRINGER HEIDELBERG
DOI: 10.1007/s00780-018-0360-z
Keywords
Market microstructure; High frequency trading; Leverage effect; Rough volatility; Hawkes processes; Limit theorems; Heston model; Rough Heston model
Categories
Funding
- ERC [679836]
- Chair Analytics and Models for Regulation
- European Research Council (ERC) [679836] Funding Source: European Research Council (ERC)
Ask authors/readers for more resources
We show that typical behaviors of market participants at the high frequency scale generate leverage effect and rough volatility. To do so, we build a simple microscopic model for the price of an asset based on Hawkes processes. We encode in this model some of the main features of market microstructure in the context of high frequency trading: high degree of endogeneity of market, no-arbitrage property, buying/selling asymmetry and presence of metaorders. We prove that when the first three of these stylized facts are considered within the framework of our microscopic model, it behaves in the long run as a Heston stochastic volatility model, where a leverage effect is generated. Adding the last property enables us to obtain a rough Heston model in the limit, exhibiting both leverage effect and rough volatility. Hence we show that at least part of the foundations of leverage effect and rough volatility can be found in the microstructure of the asset.
Authors
I am an author on this paper
Click your name to claim this paper and add it to your profile.
Reviews
Recommended
No Data Available