Linking Path-Dependent and Stochastic Volatility Models

2025/10/02 by Cohen, Samuel N., Svosve, Cephas
#62M20 #91G2 #91G70 #FOS: Economics and business #Mathematical Finance (q-fin.MF)

paper · doi:10.48550/arxiv.2510.02024

Abstract

We explore a link between stochastic volatility (SV) and path-dependent volatility (PDV) models. Using assumed density filtering, we map a given SV model into a corresponding PDV representation. The resulting specification is lightweight, improves in-sample fit, and delivers robust out-of-sample forecasts. We also introduce a calibration procedure for both SV and PDV models that produces standard errors for parameter estimates and supports joint calibration of SPX/VIX smile.

Citations

• Mimicking and Conditional Control with Hard Killing
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