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 closedform solution for pricing options that seeks to overcome the shortcomings in the BlackScholes option pricing model related to return skewness and strikeprice bias. The Heston model is a tool for advanced investors.
BREAKING DOWN '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 inthemoney or outofthemoney. The smile model's name derives from the concave shape of the graph, which resembles a smile.

Stochastic Volatility  SV
A statistical method in mathematical finance in which volatility ... 
Stochastic Modeling
A method of financial modeling in which one or more variables ... 
Volatility Smile
A ushaped pattern that develops when an optionâ€™s implied volatility ... 
Model Risk
A type of risk that occurs when a financial model used to measure ... 
Black's Model
A variation of the popular BlackScholes options pricing model ... 
LatticeBased Model
An option pricing model that involves the construction of a binomial ...

Trading
Circumvent Limitations of BlackScholes Model
Mathematical or quantitative modelbased trading continues to gain momentum, despite major failures like the financial crisis of 200809, which was attributed to the flawed use of trading models. ... 
Investing
What is a Business Model?
Business model is the term for a companyâ€™s plan as to how it will earn revenue. 
Trading
Options Pricing: BlackScholes Model
The BlackScholes model for calculating the premium of an option was introduced in 1973 in a paper entitled, "The Pricing of Options and Corporate Liabilities" published in the Journal of Political ... 
Trading
How To Build Valuation Models Like BlackScholes (BS)?
Want to build a model like BlackScholes? Here are the tips and guidelines for developing a framework with the example of the BlackScholes model. 
Trading
Understanding the BlackScholes Model
The BlackScholes model is a mathematical model of a financial market. From it, the BlackScholes formula was derived. The introduction of the formula in 1973 by three economists led to rapid ... 
Trading
Build a Profitable Trading Model In 7 Easy Steps
Trading models can provide a powerful tool for building profit. Traders can use and customize existing trading models or build an original model. This article provides seven steps to building ... 
Investing
Calculating (Small) Company Credit Risk
Determining creditworthiness of smaller and mediumsized corporations isn't as easy as for larger companies, but these tips can help. 
Investing
Understanding Financial Models
A financial model is a representation of some aspects of a firm or given security. It uses historical numbers to create calculations that inform financial recommendations or predict future financial ... 
Trading
The Anatomy of Options
Find out how you can use the "Greeks" to guide your options trading strategy and help balance your portfolio. 
Markets
Getting To Know Business Models
Learning how to assess business models helps investors identify companies that are the best investments.

What technical skills must one possess to trade options?
Learn about the technical skills required to trade options and how mathematical and computer science skills give you a better ... Read Answer >> 
What is the average return on equity for a company in the electronics sector?
Learn about the BlackScholes option pricing model and the binomial options model, and understand the advantages of the binomial ... Read Answer >> 
What is a volatility smile?
Discover what options traders mean when they refer to a "volatility smile," and learn why a volatility smile's existence ... Read Answer >> 
How is implied volatility for options impacted by a bearish market?
Learn why implied volatility for option prices increases during bear markets, and learn about the different models for pricing ... Read Answer >> 
How is implied volatility used in the BlackScholes formula?
Learn how implied volatility is used in the BlackScholes option pricing model, and understand the meaning of the volatility ... Read Answer >> 
What is the difference between financial forecasting and financial modelling?
Understand the difference between financial forecasting and financial modeling, and learn why a company should conduct both ... Read Answer >>