Pricing Partners the provider of OTC derivatives pricing analytics, mathematical models and independent valuations, has announced that its Price-it© Library now contains a model combining local and stochastic volatility.

A local volatility model aims to allow calibrating virtually at any strike and maturity provided the volatility surface which does not have any arbitrage. But its smile dynamics is not very realistic. A stochastic volatility like the Heston model generates, on the contrary, a realistic smile dynamics, but does not calibrate perfectly on all strikes and maturities. Combining the best features of the two models in a local and stochastic volatility model provides a new model that has both a realistic smile dynamics and can fit all strikes and maturities. Therefore, Pricing Partners introduced this model, an extension of the Heston model, meanwhile, where the volatility contains a local volatility term.

Eric Benhamou, CEO of Pricing Partners comments: "With this new local and stochastic volatility model, Price-it© library stays above the curve in terms of derivatives pricing models. The "generic" feature of this model allows being adapted to fx, equity but also commodity assets easily. I am sure that our users will be excited with this new technology."