A regularity structure for rough volatility

Abstract: A new paradigm recently emerged in financial modelling: rough (stochastic) volatility, first observed by Gatheral et al. in high-frequency data, subsequently derived within market microstructure models, also turned out to capture parsimoniously key stylized facts of the entire implied volatility surface, including extreme skews that were thought to be outside the scope of stochastic volatility. On the mathematical side, Markovianity and, partially, semi-martingality are lost. In this paper we show that Hairer's regularity structures, a major extension of rough path theory, which caused a revolution in the field of stochastic partial differential equations, also provides a new and powerful tool to analyze rough volatility models.