How to choose my stochastic volatility parameters? A review

TL;DR

This paper reviews various methods for selecting parameters in stochastic volatility models, especially within stochastic local volatility frameworks, to improve financial derivative pricing accuracy.

Contribution

It provides a comprehensive overview of parameter selection techniques in stochastic volatility models, including stochastic local volatility models, based on existing literature.

Findings

Summarizes key parameter estimation methods.

Highlights the integration of stochastic volatility in local volatility models.

Discusses implications for derivative pricing accuracy.

Abstract

Based on the existing literature, this article presents the different ways of choosing the parameters of stochastic volatility models in general, in the context of pricing financial derivative contracts. This includes the use of stochastic volatility inside stochastic local volatility models.