Stochastic Volatility - SV

AAA

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.

RELATED TERMS
  1. Generalized AutoRegressive Conditional ...

    A statistical model used by financial institutions to estimate ...
  2. Financial Modeling

    The process by which a firm constructs a financial representation ...
  3. Volatility

    1. A statistical measure of the dispersion of returns for a given ...
  4. Black Scholes Model

    A model of price variation over time of financial instruments ...
  5. Option Pricing Theory

    Any model- or theory-based approach for calculating the fair ...
  6. Maximum Drawdown (MDD)

    The maximum loss from a peak to a trough of a portfolio, before ...
RELATED FAQS
  1. What technical skills must one possess to trade options?

    An option is a financial derivative that gives you (as the buyer or holder) the right to buy or sell an underlying security ... Read Full Answer >>
  2. If a long call is owned on the record date of a stock, is the owner of the option ...

    The owner of a long call for a stock is entitled to a dividend only if the option is exercised prior to the ex-dividend date, ... Read Full Answer >>
  3. What is the difference between a simple random sample and a stratified random sample?

    Simple random samples and stratified random samples differ in how the sample is drawn from the overall population of data. ... Read Full Answer >>
  4. What are the advantages and disadvantages of using systematic sampling?

    As a statistical sampling method, systematic sampling is simpler and more straightforward than random sampling. It can also ... Read Full Answer >>
  5. What is the difference between the standard error of means and standard deviation?

    The standard deviation, or SD, measures the amount of variability or dispersion for a subject set of data from the mean, ... Read Full Answer >>
  6. What is the theory of asymmetric information in economics?

    The theory of asymmetric information was developed in the 1970s and 1980s as a plausible explanation for common phenomena ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Breaking Down The Binomial Model To Value An Option

    Find out how to carve your way into this valuation model niche.
  2. Investing Basics

    Pin Down Stock Price With Real Options

    How can you assign a value to what a company may do with its business in the future? We explain how it works.
  3. Options & Futures

    The "True" Cost Of Stock Options

    Perhaps the real cost of employee stock options is already accounted for in the expense of buyback programs.
  4. Options & Futures

    The Benefits And Value Of Stock Options

    The pros and cons of corporate stock options have been debated since the incentive was created. Learn more about stock option basics and the cost of stock options.
  5. Forex Education

    Stochastics: An Accurate Buy And Sell Indicator

    Find out how stochastics are used to create buy and sell signals for traders.
  6. Options & Futures

    The ABCs Of Option Volatility

    The mystery of options pricing can often be explained by a look at implied volatility (IV).
  7. Economics

    What Is Supply?

    Supply is the amount of goods a producer is willing to produce at a given price, and is one of the most basic concepts in economics.
  8. Economics

    Modified Internal Rate of Return (MIRR)

    Modified internal rate of return (MIRR) is a variant of the more traditional internal rate of return calculation.
  9. Fundamental Analysis

    What is Quantitative Analysis?

    Quantitative analysis refers to the use of mathematical computations to analyze markets and investments.
  10. Fundamental Analysis

    Understanding the Simple Random Sample

    A simple random sample is a subset of a statistical population in which each member of the subset has an equal probability of being chosen.

You May Also Like

Hot Definitions
  1. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  2. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  3. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  4. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  5. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center