A local volatility model allows calibrating virtually at any strike and maturity provided the volatility surface which does not have any arbitrage. But its smile dynamics is not very realistic. A stochastic volatility like the Heston model generates, on the contrary, a realistic smile dynamics, but does not calibrate perfectly on all strikes and maturities. Combining the best features of the two models in a local and stochastic volatility model provides a new model that has both a realistic smile dynamics and can fit all strikes and maturities. Therefore, Pricing Partners introduced this model, an extension of the Heston model, meanwhile, where the volatility contains a local volatility term.
Eric Benhamou, CEO of Pricing Partners comments: âWith this new local and stochastic volatility model, Price-itÂ© library stays above the curve in terms of derivatives pricing models. The âgenericâ feature of this model allows being adapted to fx, equity but also commodity assets easily. I am sure that our users are going to be excited with this new technology.â