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There's no best method. The question is : what is the behavior of the volatility structure (atm and skew) when the underlying moves? Each method assumes something different. In the real market, one method might work well for a period of time (in the sense that it minimizes residual p/l), but then another method might take over as best. Practitioners ...


It is not the fact that volatility is time varying that creates the skew per se, but the fact that volatility is negatively correlated with the spot. That is to say, as the stock/index price declines volatility will tend on average to increase, and vice versa. Time varying volatility itself would create a more symmetric 'smile'. Edit: Suppose that you ...

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