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q.t.f.
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The local vol model has exactly enough freedom to match the individual densities $X_t.$ There is no additional freedom in the local vol model to match even a joint density for a pair of times $(X_t,X_s).$

When you ask about the joint density across the continuum of times $t \in [0,T]$ it is pretty easy to show that any local vol model differs from any stochastic vol model provided at least one of the models has positivestochastic volatility model has nonzeeo vol-of-vol. That is because the joint density along the continuum of times gives full information about the measure on paths $X_t$.

For a local vol model, the instantaneous variance of a path $X_t$ at time $t$ is almost surely $\sigma^2(X_t,t).$ For a stochastic volatility model with nontrivial vol-of-vol this is not true for $t>0$: the instantaneous variance at time $t$ conditioned on $X_t$ is a random variable with mean $\sigma^2(X_t,t)$ but posive variance.

The local vol model has exactly enough freedom to match the individual densities $X_t.$ There is no additional freedom in the local vol model to match even a joint density for a pair of times $(X_t,X_s).$

When you ask about the joint density across the continuum of times $t \in [0,T]$ it is pretty easy to show that any local vol model differs from any stochastic vol model provided at least one of the models has positive volatility. That is because the joint density along the continuum of times gives full information about the measure on paths $X_t$.

The local vol model has exactly enough freedom to match the individual densities $X_t.$ There is no additional freedom in the local vol model to match even a joint density for a pair of times $(X_t,X_s).$

When you ask about the joint density across the continuum of times $t \in [0,T]$ it is pretty easy to show that any local vol model differs from any stochastic vol model provided the stochastic volatility model has nonzeeo vol-of-vol. That is because the joint density along the continuum of times gives full information about the measure on paths $X_t$.

For a local vol model, the instantaneous variance of a path $X_t$ at time $t$ is almost surely $\sigma^2(X_t,t).$ For a stochastic volatility model with nontrivial vol-of-vol this is not true for $t>0$: the instantaneous variance at time $t$ conditioned on $X_t$ is a random variable with mean $\sigma^2(X_t,t)$ but posive variance.

Source Link
q.t.f.
  • 1.9k
  • 11
  • 23

The local vol model has exactly enough freedom to match the individual densities $X_t.$ There is no additional freedom in the local vol model to match even a joint density for a pair of times $(X_t,X_s).$

When you ask about the joint density across the continuum of times $t \in [0,T]$ it is pretty easy to show that any local vol model differs from any stochastic vol model provided at least one of the models has positive volatility. That is because the joint density along the continuum of times gives full information about the measure on paths $X_t$.