Local Stochastic Vol Modeling

objective

Calibrate and validate local/stochastic vol models with surface-consistency and hedging diagnostics.

workflow

1. define calibration instruments, objective function, and constraints.
2. fit local-vol or stochastic-vol parameters with stable optimization.
3. validate no-arbitrage surface properties and calibration residuals.
4. test hedge performance under dynamic surface scenarios.
5. promote only when model risk metrics are within policy limits.

required diagnostics

• calibration residual heatmap across strike and tenor.
• parameter stability and identifiability diagnostics.
• surface smoothness and static-arbitrage checks.
• hedge error under scenario-based surface moves.
• out-of-sample pricing error across re-calibration windows.