Boundary behaviour of the Volterra square-root process

Abstract

In this work, we study the boundary behaviour of the Volterra square-root process on ${\mathbb{R}}_{+}$. For regular Volterra kernels, we establish a time-dependent Feller condition that guarantees that the process does not hit zero on $[0,T]$, and prove finiteness of negative $p$-moments. For rough kernels that are regularly varying at zero, we show that the process necessarily hits zero with positive probability, and that its law has an atom at the boundary. Finally, we establish analogous results for the limit distribution. Our proofs are based on comparison principles for Volterra integral equations and generalized Riemann--Liouville fractional equations. The latter provide us with upper and lower bounds for the solution of the associated Volterra Riccati equation, and hence bounds on the Laplace transform. As an application, we study the structure of equivalent martingale measures in the Volterra Heston model. For the rough case, we show that equivalent martingale measures exist only under very restrictive assumptions on the drift under the real-world measure.