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Quantitative Finance · Begrippenlijst

Wat is Heston model?

Definition 10.2 Derivatives and Volatility · Hoofdstuk 10 — Stochastic Volatility

The Heston model takes the variance to be a square-root process (One Quant Book 4, chapter 4):

dvt=κ(vˉ−vt) dt+ηvt dWt2,dv_t=\kappa(\bar v-v_t)\,dt+\eta\sqrt{v_t}\,dW^2_t,

with five parameters: the initial variance v0v_0, the mean-reversion speed κ\kappa, the long-run variance vˉ\bar v, the volatility of volatility η\eta and the correlation ρ\rho. The variance stays non-negative and never reaches zero when the Feller condition 2κvˉ≥η22\kappa\bar v\ge\eta^2 holds.

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