Chapter

Stochastic Volatility

Volatility

  1. Anatoliy Swishchuk PhD

Published Online: 15 DEC 2012

DOI: 10.1002/9781118182635.efm0129

Encyclopedia of Financial Models

Encyclopedia of Financial Models

How to Cite

Swishchuk, A. 2012. Stochastic Volatility. Encyclopedia of Financial Models. .

Author Information

  1. Professor of Mathematics and Statistics, University of Calgary

Publication History

  1. Published Online: 15 DEC 2012

Abstract

Volatility, as measured by the standard deviation, is an important concept in financial modeling because it measures the change in value of a financial instrument over a specific horizon. The higher the volatility, the greater the price risk of a financial instrument. There are different types of volatility: historical, implied volatility, level-dependent volatility, local volatility, and stochastic volatility (e.g., jump-diffusion volatility). Stochastic volatility models are used in the field of quantitative finance. Stochastic volatility means that the volatility is not a constant, but a stochastic process and can explain volatility smile and skew.

Keywords:

  • stochastic volatility;
  • subordinator;
  • historical volatility;
  • implied volatility;
  • local volatility;
  • level-dependent volatility;
  • local volatility (LV);
  • stochastic volatility;
  • level-dependent;
  • stochastic volatility model;
  • jump-diffusion volatility