The Zumbach Effect Under Rough Heston
Quantitative Finance, Vol. 20, No. 2, 235-241, 2020.
14 Pages Posted: 24 Sep 2018 Last revised: 9 Jan 2020
Date Written: September 6, 2018
Previous literature has identified an effect, dubbed the Zumbach effect, that is nonzero empirically but conjectured to be zero in any conventional stochastic volatility model. Essentially this effect corresponds to the property that past squared returns forecast future volatilities better than past volatilities forecast future squared returns. We provide explicit computations of the Zumbach effect under rough Heston and show that they are consistent with empirical estimates. In agreement with previous conjectures however, the Zumbach effect is found to be negligible in the classical Heston model.
Keywords: Zumbach Effect, Rough Heston Model
JEL Classification: C5, C56
Suggested Citation: Suggested Citation