Local Volatility vs. Stochastic Volatility

Are there any empirical observations or practices when to prefer Local Volatility Model for pricing over Stochastic Model or vice versa?

Answer

There is another reason why Stoc Vol Models should be usually preferred to Local Vol Models, this reason is explained in the Hagan et al. paper "Managing Smile Risk" about SABR process and is in simple terms the fact that "smile dynamics" is poorly predicted by local vol models leading to bad Hedging of exotic options.

Anyway Local Vol models have the good feature to be "arbitrage free" (at the begining) and I think that some link between both approach can be achieved by Markovian Projection Method.for this you can have a look at V. Piterbarg's paper on the subject and the references therein.

Regards