Seeking recommendations for local/stoch vol libraries

[LM3886]

there are probably studies about this. if you look up trinomial pricing models or binomial pricing models you might find something.

The firm i was at spent years building a trinomial pricing model with jumps. Honestly I don't it gave us any better understanding of listed options than a simple black scholes. What happened a lot is that the model would come up with a vastly different price than the market for the wings (as it was calibrated for the atm) but instead of those wings being tradeable opportunities, if someone blindly followed the model, they would arbitrage themselves left and right.

Interesting. Did they end up not using the trinomial model and using BS instead?

 

[LM3886]

Hey I think it depends how you are going to use it to make money. Recall with spot and cash only the risk neutral measure is given and the vol you can move. With stochastic vol the vanilla surface+spot+cash theoretically are initial conditions required for your pricing measure . Vix options allow you to make the vol of vol a local process from observable prices to reduce the free parametres. Assuming you are not pricing exotics you would need to decide how to isolate the effect you want via your vega hedging and delta hedging strategy otherwise it would just return the market prices.

Yes, it should match market price if evaluated at the current time because it was fit to that. I was hoping to get the underlying-vol correlation by the local/stoch vol model. I think slope of skew from BS is an approximation to that, but I often observe correlations larger than that from market history.