Reading material for understanding Local Volatility

Aber

Member
I am studying graduate courses in Finance. One thing I have stumbled upon and cannot quite understand is the concept of 'Local Volatility' and 'Stochastic Vol', especially local vol. I have done a lot of experiments and calibrations but in words I am not able to explain what local vol is.

Can people in here suggest reading materials in form of articles/academic paper and so on (not books) who put words to the equations and gives INTUITION explanations about local and stochastic vol.

I am not thinking of some specific model but more the CONCEPT of it
 

Math_Lounge

New Member
I found Derman's explanations very concise and clear. He has a paper on his website that explains local volatility. Personally, I prefer the explanation in his book, it's a deeper explanation with some numerical examples. He dedicates two chapters to covering local volatility models and their implications.

Another good introduction is this paper by Fredrik Armerin (though it leans more towards stochastic volatility, but is still a great read).

Derman's paper - Emanuel Derman
Derman's book - https://www.amazon.com/Volatility-Smile-Wiley-Finance/dp/1118959167/
Amerin's paper - https://people.kth.se/~armerin/document/stochvol.pdf
 

Aber

Member
I found Derman's explanations very concise and clear. He has a paper on his website that explains local volatility. Personally, I prefer the explanation in his book, it's a deeper explanation with some numerical examples. He dedicates two chapters to covering local volatility models and their implications.

Another good introduction is this paper by Fredrik Armerin (though it leans more towards stochastic volatility, but is still a great read).

Derman's paper - Emanuel Derman
Derman's book - https://www.amazon.com/Volatility-Smile-Wiley-Finance/dp/1118959167/
Amerin's paper - https://people.kth.se/~armerin/document/stochvol.pdf
I just went through two chapter of his book. You're right; it is written really well! Thanks
 
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