Stochastic Volatility - SV

DEFINITION of 'Stochastic Volatility - SV'

A statistical method in mathematical finance in which volatility and codependence between variables is allowed to fluctuate over time rather than remain constant. "Stochastic" in this sense refers to successive values of a random variable that are not independent. Stochastic volatility is typically analyzed through sophisticated models, which became increasingly useful and accurate as computer technology improved.

Examples of stochastic volatility models include the Heston model, the SABR model, the Chen model and the GARCH model.

BREAKING DOWN 'Stochastic Volatility - SV'

Stochastic volatility models for options were developed out of a need to modify the Black Scholes model for option pricing, which failed to effectively take the volatility in the price of the underlying security into account. The Black Scholes model assumed that the volatility of the underlying security was constant, while stochastic volatility models categorized the price of the underlying security as a random variable. Allowing the price to vary in the stochastic volatility models improved the accuracy of calculations and forecasts.

RELATED TERMS
  1. Heston Model

    A type of stochastic volatility model developed by associate ...
  2. Local Volatility

    A model used in quantitative finance to calculate the unpredictability ...
  3. Black Scholes Model

    A model of price variation over time of financial instruments ...
  4. Model Risk

    A type of risk that occurs when a financial model used to measure ...
  5. Implied Volatility - IV

    The estimated volatility of a security's price.
  6. Hull–White Model

    A single-factor interest model used to price derivatives. The ...
Related Articles
  1. Trading Strategies

    Do You Have The Right Settings On Your Stochastic?

    Use these helpful tips to unlock Stochastics' full potential.
  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. Trading Strategies

    Know the Forces At Play Behind The Buy/Sell Cycles

    Weekly Stochastics uncovers patterns of buying and selling pressure that can be predicted and capitalized upon by observant investors and traders.
  4. Forex Education

    Combined Forces Power Forex Snap Strategy

    Stochastic and MACD oscillators can help isolate greater opportunities in range-bound markets.
  5. Charts & Patterns

    Stochastics: An Accurate Buy And Sell Indicator

    Stochastics measure the relationship between an issue’s closing price and its price range over a period of time.
  6. Stock Analysis

    Two Indicators Are Better Than One

    The MACD and Stochastic are an ideal pairing. The bullish crossovers that have occurred on these charts should catch the eye of short-term traders.
  7. Investing News

    How Do Professionals Forecast Crude Oil Prices?

    Discover how the future price of oil is predicted with a weighted combination of mathematical tools. Economists largely use five main models as their base.
  8. Economics

    What is a Business Model?

    Business model is the term for a company’s plan as to how it will earn revenue.
  9. Options & Futures

    Circumvent Limitations of Black-Scholes Model

    Mathematical or quantitative model-based trading continues to gain momentum, despite major failures like the financial crisis of 2008-09, which was attributed to the flawed use of trading models. ...
  10. Trading Strategies

    Trading Volatile Stocks with Technical Indicators

    Short-term traders seek volatility because of the profit potential, which leads to two common questions. How do I find volatile stocks? And how do I use technical indicators to trade them? Find ...
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 Answer >>
  2. 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 >>
  3. What are the best technical indicators to complement the Stochastic Oscillator?

    Explore the function of the stochastic oscillator indicator, and discover other technical indicators traders use to complement ... Read Answer >>
  4. How do I read and interpret an Stochastic Oscillator?

    Understand the basics of the stochastic oscillator and how analysts and traders use this measure of trend momentum to predicts ... Read Answer >>
  5. What is the difference between Stochastic Oscillator & Stochastic Momentum Index?

    Discover how the stochastic oscillator and the Stochastic Momentum Index differ and why the latter is considered a more refined ... Read Answer >>
  6. How do I use Stochastic Oscillator to create a forex trading strategy?

    Learn about the stochastic oscillator and how to it is used to create an effective forex trade strategy, including how to ... Read Answer >>
Hot Definitions
  1. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  2. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  3. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  4. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  5. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  6. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
Trading Center