Heston Model

AAA

DEFINITION of 'Heston Model'

A type of stochastic volatility model developed by associate finance professor Steven Heston in 1993 for analyzing bond and currency options. The Heston model is a closed-form solution for pricing options that seeks to overcome the shortcomings in the Black-Scholes option pricing model related to return skewness and strike-price bias. The Heston model is a tool for advanced investors.

INVESTOPEDIA EXPLAINS 'Heston Model'

Stochastic volatility models use statistical methods to calculate and forecast options pricing. They are based on the assumption that the volatility of the underlying security is arbitrary. Other types of stochastic volatility models include the SABR model, the Chen model and the GARCH model. The Heston model is also a type of standard smile model. "Smile" refers to the volatility smile, a graphical representation of several options with identical expiration dates that shows increasing volatility as the options become more in-the-money or out-of-the-money. The smile model's name derives from the concave shape of the graph, which resembles a smile.

RELATED TERMS
  1. Volatility Smile

    A u-shaped pattern that develops when an option’s implied volatility ...
  2. Stochastic Volatility - SV

    A statistical method in mathematical finance in which volatility ...
  3. Implied Volatility - IV

    The estimated volatility of a security's price. In general, implied ...
  4. Momentum

    The rate of acceleration of a security's price or volume. The ...
  5. Stochastic Oscillator

    A technical momentum indicator that compares a security's closing ...
  6. StochRSI

    An indicator used in technical analysis that ranges between zero ...
RELATED FAQS
  1. What is the difference between fast and slow stochastics in technical analysis?

    The main difference between fast and slow stochastics is summed up in one word: sensitivity. The fast stochastic is more ... Read Full Answer >>
  2. Would a slow stochastic be effective in day trading?

    Given the hundreds of indicators that are available to traders, finding the appropriate technical tools to use in day trading ... Read Full Answer >>
Related Articles
  1. Active Trading

    Using Trading Indicators Effectively

    Select multiple indicators, avoid information overload and optimize indicators to effectively use technical analysis tools.
  2. Forex Education

    Stochastics: An Accurate Buy And Sell Indicator

    Find out how stochastics are used to create buy and sell signals for traders.
  3. Forex Education

    Anticipate Trends To Find Profits

    Monitoring your trades in real-time can help you anticipate their outcomes.
  4. Options & Futures

    Options and Roth IRAs: Do's and Don'ts

    A breakdown of the do's and don'ts of trading options in a Roth IRA.
  5. Options & Futures

    5 Secrets You Didn't Know About Roth IRAs

    Between its generous tax benefits at retirement and no required minimum distributions, a Roth IRA is well worth considering if you're eligible to have one.
  6. Forex Strategies

    The 10 Riskiest Investments

    Investors seeking high returns must also be prepared for high risk. Here are ten of the riskiest investments available.
  7. Options & Futures

    Trade Covered Calls On High Dividend Paying Stocks

    We explain the risks, rewards, timing, and profit and loss considerations for covered calls with dividend stocks.
  8. Options & Futures

    Was Buffet Right about Derivatives as WMDs?

    Why Warren Buffet described derivatives as weapons of mass destruction, and when can they be helpful or harmful?
  9. Stock Analysis

    A Trader's Look at the S&P 500

    Moving averages are sending an important signal, and it's probably not what you think.
  10. Chart Advisor

    Is Now the Time to Invest in North America?

    Bullish chart patterns across the North American markets suggest that now might actually be a wise time to allocate closer to home.

You May Also Like

Hot Definitions
  1. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  2. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  3. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  4. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  5. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  6. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
Trading Center