What is “Lambda” in Heston's original paper on stochastic volatility models?
$begingroup$
In his paper (link), he has the equations:
b1 = k + ƛ - (ρ * σ)
b2 = k + ƛ
k is the rate of mean reversion, ρ is the correlation between the two Wiener processes, σ is vol of vol, what is ƛ?
I have yet to figure out what ƛ is.
Thanks!
options stochastic-processes
edited Apr 21 at 21:48
Alex C
6,74211123
asked Apr 21 at 21:29
vt_ogvt_og
233
$endgroup$
add a comment |
$begingroup$
In his paper (link), he has the equations:
b1 = k + ƛ - (ρ * σ)
b2 = k + ƛ
k is the rate of mean reversion, ρ is the correlation between the two Wiener processes, σ is vol of vol, what is ƛ?
I have yet to figure out what ƛ is.
Thanks!
options stochastic-processes
edited Apr 21 at 21:48
Alex C
6,74211123
asked Apr 21 at 21:29
vt_ogvt_og
233
$endgroup$
add a comment |
$begingroup$
In his paper (link), he has the equations:
b1 = k + ƛ - (ρ * σ)
b2 = k + ƛ
k is the rate of mean reversion, ρ is the correlation between the two Wiener processes, σ is vol of vol, what is ƛ?
I have yet to figure out what ƛ is.
Thanks!
options stochastic-processes
edited Apr 21 at 21:48
Alex C
6,74211123
asked Apr 21 at 21:29
vt_ogvt_og
233
$endgroup$
In his paper (link), he has the equations:
b1 = k + ƛ - (ρ * σ)
b2 = k + ƛ
k is the rate of mean reversion, ρ is the correlation between the two Wiener processes, σ is vol of vol, what is ƛ?
I have yet to figure out what ƛ is.
Thanks!
options stochastic-processes
options stochastic-processes
edited Apr 21 at 21:48
Alex C
6,74211123
asked Apr 21 at 21:29
vt_ogvt_og
233
edited Apr 21 at 21:48
Alex C
6,74211123
asked Apr 21 at 21:29
vt_ogvt_og
233
edited Apr 21 at 21:48
Alex C
6,74211123
edited Apr 21 at 21:48
Alex C
6,74211123
edited Apr 21 at 21:48
Alex C
6,74211123
6,74211123
asked Apr 21 at 21:29
vt_ogvt_og
233
asked Apr 21 at 21:29
vt_ogvt_og
233
asked Apr 21 at 21:29
vt_ogvt_og
233
233
add a comment |
add a comment |
2 Answers
2
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$begingroup$
It is on page 329 (which is the third page of the article) and represents the market price of volatility risk. I have copied below from the original article:
answered Apr 21 at 21:50
Magic is in the chainMagic is in the chain
1,26415
$endgroup$
add a comment |
$begingroup$
That is the "price of volatility risk" (see Page 329)
When volatility can change the "attitude" of investors to these changes becomes important for pricing options. This like/dislike for vol increases is captured in the parameter $lambda$. In practice vol goes up i.e. $dv$ is positive, in bad economic times, such as recessions, when $dC$ is negative. So $lambda$ is negative.
answered Apr 21 at 21:48
Alex CAlex C
6,74211123
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add a comment |
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2 Answers
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2 Answers
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$begingroup$
It is on page 329 (which is the third page of the article) and represents the market price of volatility risk. I have copied below from the original article:
answered Apr 21 at 21:50
Magic is in the chainMagic is in the chain
1,26415
$endgroup$
add a comment |
$begingroup$
It is on page 329 (which is the third page of the article) and represents the market price of volatility risk. I have copied below from the original article:
answered Apr 21 at 21:50
Magic is in the chainMagic is in the chain
1,26415
$endgroup$
add a comment |
$begingroup$
It is on page 329 (which is the third page of the article) and represents the market price of volatility risk. I have copied below from the original article:
answered Apr 21 at 21:50
Magic is in the chainMagic is in the chain
1,26415
$endgroup$
It is on page 329 (which is the third page of the article) and represents the market price of volatility risk. I have copied below from the original article:
answered Apr 21 at 21:50
Magic is in the chainMagic is in the chain
1,26415
answered Apr 21 at 21:50
Magic is in the chainMagic is in the chain
1,26415
answered Apr 21 at 21:50
Magic is in the chainMagic is in the chain
1,26415
answered Apr 21 at 21:50
Magic is in the chainMagic is in the chain
1,26415
1,26415
add a comment |
add a comment |
$begingroup$
That is the "price of volatility risk" (see Page 329)
When volatility can change the "attitude" of investors to these changes becomes important for pricing options. This like/dislike for vol increases is captured in the parameter $lambda$. In practice vol goes up i.e. $dv$ is positive, in bad economic times, such as recessions, when $dC$ is negative. So $lambda$ is negative.
answered Apr 21 at 21:48
Alex CAlex C
6,74211123
$endgroup$
add a comment |
$begingroup$
That is the "price of volatility risk" (see Page 329)
When volatility can change the "attitude" of investors to these changes becomes important for pricing options. This like/dislike for vol increases is captured in the parameter $lambda$. In practice vol goes up i.e. $dv$ is positive, in bad economic times, such as recessions, when $dC$ is negative. So $lambda$ is negative.
answered Apr 21 at 21:48
Alex CAlex C
6,74211123
$endgroup$
add a comment |
$begingroup$
That is the "price of volatility risk" (see Page 329)
When volatility can change the "attitude" of investors to these changes becomes important for pricing options. This like/dislike for vol increases is captured in the parameter $lambda$. In practice vol goes up i.e. $dv$ is positive, in bad economic times, such as recessions, when $dC$ is negative. So $lambda$ is negative.
answered Apr 21 at 21:48
Alex CAlex C
6,74211123
$endgroup$
That is the "price of volatility risk" (see Page 329)
When volatility can change the "attitude" of investors to these changes becomes important for pricing options. This like/dislike for vol increases is captured in the parameter $lambda$. In practice vol goes up i.e. $dv$ is positive, in bad economic times, such as recessions, when $dC$ is negative. So $lambda$ is negative.
answered Apr 21 at 21:48
Alex CAlex C
6,74211123
edited Apr 22 at 13:02
answered Apr 21 at 21:48
Alex CAlex C
6,74211123
answered Apr 21 at 21:48
Alex CAlex C
6,74211123
answered Apr 21 at 21:48
Alex CAlex C
6,74211123
6,74211123
add a comment |
add a comment |
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