Volatility Modeling with Rough Paths: A Signature-Based Alternative to Classical Expansions (2507.23392v1)

Abstract: We compare two methodologies for calibrating implied volatility surfaces: a second-order asymptotic expansion method derived via Malliavin calculus, and a data-driven approach based on path signatures from rough path theory. The former, developed in Al`os et al. (2015), yields efficient and accurate calibration formulas under the assumption that the asset price follows a Heston-type stochastic volatility model. The latter models volatility as a linear functional of the signature of a primary stochastic process, enabling a flexible approximation without requiring a specific parametric form. Our numerical experiments show that the signature-based method achieves calibration accuracy comparable to the asymptotic approach when the true dynamics are Heston. We then test the model in a more general setting where the asset follows a rough Bergomi volatility process-a regime beyond the scope of the asymptotic expansion-and show that the signature approach continues to deliver accurate results. These findings highlight the model-independence, robustness and adaptability of signature-based calibration methods in settings where volatility exhibits rough or non-Markovian features.