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. Stochastic Oscillator

    A technical momentum indicator that compares a security's closing ...
  5. Momentum

    The rate of acceleration of a security's price or volume. The ...
  6. StochRSI

    An indicator used in technical analysis that ranges between zero ...
Related Articles
  1. Using Trading Indicators Effectively
    Active Trading

    Using Trading Indicators Effectively

  2. Stochastics: An Accurate Buy And Sell ...
    Forex Education

    Stochastics: An Accurate Buy And Sell ...

  3. Anticipate Trends To Find Profits
    Forex Education

    Anticipate Trends To Find Profits

  4. What is the difference between fast ...
    Trading Strategies

    What is the difference between fast ...

comments powered by Disqus
Hot Definitions
  1. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  2. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  3. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  4. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  5. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
  6. Gresham's Law

    A monetary principle stating that "bad money drives out good." In currency valuation, Gresham's Law states that if a new ...
Trading Center