Local versus Stochastic Vol

[gver]

Hi .. cld anyone help me with the intuitive difference between the two vols .. I mean I read stochastics is where the vol itself is considered to be a stoch process and in local it depends on S and T .. but I am not able to get an intuitive hang of the two .. and consequently how one is better than other while pricing certain products that account fwd skew etc ..

Thanks

 

[Daniel Duffy]

Option Valuation under Stochastic Volatility II: With Mathematica Code: Alan L Lewis: 9780967637211: Amazon.com: Books

 

[gver]

Thanks for the prompt reply Daniel. I googled abt the book and it seems a lot of PDE and stuff .. as of now I am looking for an intuitive explanation rather than a rigourous mathematical treatment .. my interest is more from a pricing and hedging equity derivatives and hybrids perspective and hence want to gain an insight into the practical applicability..

 

[Daniel Duffy]

You're welcome.
Paul Wilmott's book Vol 3 is a good overview without all that heavy PDE machinery.

have you looked at nuclearphynance.com?

//
On the other hand it seems as if PDE is used a lot for this.

 

[gver]

Yes I gave a cursory look to some answers in np but mostly the same tech definitions ..

Was optimistic abt a prompt response over here so posted it

 

[vertigo]

stochastic vol models generate the same smile independent of the initial level of spot: a sticky delta model. the smiles generated by local vol models are dependent on the initial level of spot: a sticky strike model.

neither of these models on their own reflect what occurs in FX markets. a mixture of the two is better.