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In finance, the Heston model, named after Steven L. Heston, is a mathematical model that describes the evolution of the volatility of an underlying asset. [1] It is a stochastic volatility model: such a model assumes that the volatility of the asset is not constant, nor even deterministic, but follows a random process.
Portfolio return volatility is a function of the correlations ρ ij of the component assets, for all asset pairs (i, j). The volatility gives insight into the risk which is associated with the investment. The higher the volatility, the higher the risk. In general: Expected return:
Higher volatility of returns after retirement may result in withdrawals having a larger permanent impact on the portfolio's value; Price volatility presents opportunities to anyone with inside information to buy assets cheaply and sell when overpriced; Volatility affects pricing of options, being a parameter of the Black–Scholes model.
Closely related is the volatility smile, where, as above, implied volatility – the volatility corresponding to the BSM price – is observed to differ as a function of strike price (i.e. moneyness), true only if the price-change distribution is non-normal, unlike that assumed by BSM. The term structure of volatility describes how (implied ...
The Merton model, [1] developed by Robert C. Merton in 1974, is a widely used "structural" credit risk model. Analysts and investors utilize the Merton model to understand how capable a company is at meeting financial obligations, servicing its debt, and weighing the general possibility that it will go into credit default.
The volatility of volatility controls its curvature. The above dynamics is a stochastic version of the CEV model with the skewness parameter β {\displaystyle \beta } : in fact, it reduces to the CEV model if α = 0 {\displaystyle \alpha =0} The parameter α {\displaystyle \alpha } is often referred to as the volvol , and its meaning is that of ...
Image source: The Motley Fool. Citigroup (NYSE: C) Q4 2024 Earnings Call Jan 15, 2025, 11:00 a.m. ET. Contents: Prepared Remarks. Questions and Answers. Call ...
The ECB acknowledged "The interconnectedness of the accounting and prudential frameworks" and consistently adopted in its inspections on banks a comprehensive perspective covering both the accounting space ("valuation uncertainty, observability of valuation inputs, model risk, fair value classification, recognition of profits when instruments ...