Rough volatility, path-dependent PDEs and weak rates of convergence

Abstract

In the setting of stochastic Volterra equations, and in particular rough volatility models, we show that conditional expectations are the unique classical solutions to path-dependent PDEs. The latter arise from the functional Itô formula developed by [Viens, F., & Zhang, J. (2019). A martingale approach for fractional Brownian motions and related path dependent PDEs. Ann. Appl. Probab.]. We then leverage these tools to study weak rates of convergence for discretised stochastic integrals of smooth functions of a Riemann-Liouville fractional Brownian motion with Hurst parameter $H\in (0,\frac{1}{2})$. These integrals approximate log-stock prices in rough volatility models. We obtain the optimal weak error rates of order $1$ if the test function is quadratic and of order $(3H+\frac{1}{2})\wedge 1$ if the test function is five times differentiable; in particular these conditions are independent of the value of $H$.

63 pages. We corrected some typos and edited the assumptions of Proposition 2.14