by Ian Berk, Massimo Guidolin, Monia Magnani
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Suggested foundations for volatility models and surfaces and trading research and honest backtests. Specialist prerequisites vary by paper.
Follow diffusion-based models and their assumptions.
Separate conditional volatility from observed returns.
Use only information available at the simulated decision time.
Separate model selection from the final evaluation.
Study a correlated stochastic-variance model.
Interpret prices across strikes and expiries.
Reconcile signals, executions, positions and P&L.
Start in discrete time, move to Brownian motion, then read the original pricing argument and simulate it.
Choose a reproducible strategy, specify the trading rule, and test what remains after costs and estimation uncertainty.