How to choose my stochastic volatility parameters? A review

ArXiv ID: 2512.19821 “View on arXiv”

Authors: Fabien Le Floc’h

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.

Keywords: Stochastic Volatility, Local Volatility, Derivatives Pricing, Parameter Estimation, Volatility Modeling, Equity Derivatives

Complexity vs Empirical Score

• Math Complexity: 9.0/10
• Empirical Rigor: 2.0/10
• Quadrant: Lab Rats
• Why: The paper presents advanced stochastic differential equations (SDEs) and derivations for multiple SV models, indicating high mathematical density, but it is a review article with no datasets, backtests, or implementation details for practical trading.

  flowchart TD
    RQ["Research Question<br>How to choose SV parameters?"] --> Input["Data: Derivative Pricing Context<br>SV & SVSLV Models"]
    Input --> Method["Methodology: Literature Review"]
    Method --> Comp["Computation: Parameter Estimation<br>via ML, GMM, MCMC"]
    Comp --> Out["Findings: Parameter Selection<br>Guidelines & Outcomes"]