Derivative pricing under the possibility of long memory in the supOU stochastic volatility model

Abstract

We consider the supOU stochastic volatility model which is able to exhibit long-range dependence. For this model we give conditions for the discounted stock price to be a martingale, calculate the characteristic function, give a strip where it is analytic and discuss the use of Fourier pricing techniques. Finally, we present a concrete specification with polynomially decaying autocorrelations and calibrate it to observed market prices of plain vanilla options.