Alexander, Carol; Nogueira, Leonardo M. - Henley Business School, University of Reading - 2004
We derive the local volatility hedge ratios that are consistent with a stochastic instantaneous volatility and show … that this ‘stochastic local volatility’ model is equivalent to the market model for implied volatilities. We also show that … a common feature of all Markovian single factor stochastic volatility models, (log)normal mixture option pricing models …