Smile dynamics III

To remedy some of the limitations of popular models used for equity derivatives hightlighted in previous work (Bergomi, 2004), we proposed a stochastic volatility model based on a specification of the joint dynamics of the underlying spot and its implied forward variance swap (VS) variances (Bergomi, 2005). The aim of this model was to afford better control of: - the term structure of the volatility of volatility; - the forward skew; and - the correlation between spot and VS volatilities for