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.

Investopedia explains '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.



comments powered by Disqus
Hot Definitions
  1. Walras' Law

    An economics law that suggests that the existence of excess supply in one market must be matched by excess demand in another market so that it balances out. So when examining a specific market, if all other markets are in equilibrium, Walras' Law asserts that the examined market is also in equilibrium.
  2. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will respond similarly to a marketing action. Market segmentation enables companies to target different categories of consumers who perceive the full value of certain products and services differently from one another.
  3. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following:
  4. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option is purchased and the lower premium option is sold - both at the same time. The higher the debit spread, the greater the initial cash outflow the investor will incur on the transaction.
  5. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious debt when government leaders use borrowed funds in ways that don't benefit or even oppress citizens. Some legal scholars argue that successor governments should not be held accountable for odious debt incurred by earlier regimes, but there is no consensus on how odious debt should actually be treated.
  6. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the acquiring company will make an offer for the outstanding shares.
Trading Center