Local Volitility

This chapter covers the simplest and most widely used stochastic volatility model:
the local volatility model. Local volatility [37], [40] was introduced as an extension
of the Black-Scholes model that can be exactly calibrated to the whole volatility
surface bKT .





While its proponents did not have stochastic volatility in mind, local volatility is
a particular breed of stochastic volatility. It is also the simplest market model.