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I am looking for references on volatility models. I want to gain more insights on these models but have a little background as of now. Thus, looking for references that can pick the topic from basics and build the concepts gradually. For e.g. a reading that starts from basics of local vol and describes about the calibration process too.

Thanks in advance

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    $\begingroup$ If you are starting from basics, I can recommend the book on Smile Pricing Explained by Austing. On the calibration process, for optimization algorithms I recommend Numerical Optimization by Nocedal and Wright; for more practical matters (e.g. to what instruments should we calibrate? etc.), this is more of an experience-based matter. There are some hints here and there in Andersen's and Piterbarg's Interest Rate Modelling. $\endgroup$
    – Daneel Olivaw
    Jun 23, 2020 at 15:33

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I have also currently started to learn about the subject. This is some of the material I have encountered:

Many people recommend the book "The Volatility Surface: A Practitioner's Guide" by Jim Gatheral. It is a standard reference in the area (even though I personally found it a bit confusing and a bit unclear at some parts). The author also have some lectures in the area online one can download for free.

I found a nice master thesis that explains a lot about the calibration of the local volatility surface called "Calibrating the local volatility model" by Lykke Rasmussen. It can be downloaded online as well.

A standard reference in the area of calibrating the local vol surface is also the article "volatility interpolation" by J. Andreasen and B. Huge. It is very brief though and do not elaborate on details, so it is a good idea to use other references at the same time.

The blog "Chase the devil" and the article "don't stay flat" by Fabien Le Floc'h contains a nice comment on the article of Andreasen, Huge about the interpolation used and suggest piecewise linear interpolation instead of piecewise constant interpolation as in the mentioned article, to avoid volatility blowups in some cases.

There is also a book called "Stochastic volatility modeling" where you can find the first two chapters for free (about local vol for among other things). You find it here: https://www.lorenzobergomi.com/contents-sample-chapters.

OpenGamma also have an article called "local volatility" about interpolation of the implied volatility surface and construction of the local volatility surface. It seems a bit too advanced for me at the moment, but it might be a good reference.

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  • $\begingroup$ Hi Jesper, thanks for the help. Even I was going through Jim Gatheral, but found it bit advance or confusing I would say for the first reading. I will check the other references. Thank you $\endgroup$
    – User
    Jun 23, 2020 at 11:32

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