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Jurassic


Total Posts: 358
Joined: Mar 2018
 
Posted: 2019-12-31 10:17
Why did stochastic vol replace local vol? I seem to remember there was something to do with french banks exploiting this

silverside


Total Posts: 1417
Joined: Jun 2004
 
Posted: 2020-01-02 16:51
not an equity guy but I think it was something to do with local vol models mispricing forward vol, and volvol

I also suspect that a lot of this knowledge has got lost in time as the fun work which was happening in the 2000's has got replaced by lots of xVA analysis and regulatory driven stuff ?

ronin


Total Posts: 585
Joined: May 2006
 
Posted: 2020-01-02 23:12
> I seem to remember there was something to do with french banks exploiting this

Haha, no - the exact opposite.

"There is a SIX am?" -- Arthur

chiral3
Founding Member

Total Posts: 5163
Joined: Mar 2004
 
Posted: 2020-01-02 23:29
The french banks spend a bunch of time debating the "right price" and the "right vol, fwd skew, vov.." but at the end of the the day the traders trade and the buyers buy.

I think silverside is right too: lots of locally capped cliquet-like structures and asian structured made stoch vol easy to implement.

Nonius is Satoshi Nakamoto. 物の哀れ

Strange


Total Posts: 1648
Joined: Jun 2004
 
Posted: 2020-01-03 04:45
>Why did stochastic vol replace local vol? I seem to remember there was something to do with french banks exploiting this

I recall Natixis was really exploiting it about a year ago :D

'Progress just means bad things happen faster.’

willis


Total Posts: 25
Joined: Feb 2005
 
Posted: 2020-01-08 05:11
lol, exploit.

Blendertime

frolloos


Total Posts: 121
Joined: Dec 2007
 
Posted: 2020-01-08 13:06
so what is it actually? local vol is made in France, and since Bergome is French/Italian I suppose stoch vol is made in France as well. Hence settle for local stoch vol? seriously, I don't know anymore what is market standard.

No vanna, no cry

nikol


Total Posts: 1124
Joined: Jun 2005
 
Posted: 2020-01-08 15:56
@frolloos

"since Bergome is French/Italian I suppose stoch vol is made in France as well"

Be careful, there might be all kind of problems on french/italian border.

"The Law is Law" (with subtitles, 1958)
https://www.youtube.com/watch?v=_rNsgAmF7jQ

frolloos


Total Posts: 121
Joined: Dec 2007
 
Posted: 2020-01-09 05:24
@nikol:

yes, funny little thing these lines called borders. good movie by the way.

No vanna, no cry
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