From the Quintic model to signature volatility models: fast pricing and hedging with Fourier

We will introduce the Quintic Ornstein-Uhlenbeck model that jointly calibrates SPX-VIX options with a particular focus on its mathematical tractability namely for fast pricing SPX options using Fourier techniques. Then, we will consider the more general class of  stochastic volatility models where the dynamics of the volatility are given by a possibly infinite linear combination of the elements of the time extended signature of a Brownian motion. First, we show that the model is remarkably universal, as it includes, but is not limited to, the celebrated Stein-Stein, Bergomi, and Heston models, together with some path-dependent variants. Second, we derive the joint characteristic functional of the log-price and integrated variance provided that some infinite-dimensional extended tensor algebra valued Riccati equation admits a solution. This allows us to price and (quadratically) hedge certain European and path-dependent options using Fourier inversion techniques. We highlight the efficiency and accuracy of these Fourier techniques in a comprehensive numerical study.