Introduction to Stochastic Volatility Models

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In this video, I will introduce the stochastic volatility models which assume that the asset price but also its variance follow stochastic processes.
Such models are used in finance to simulate the price of the underlying asset and then to value options.
They are able to explain with a few additional parameters why the Black-Scholes implied volatility of options with different strike prices or time to maturity are different.

0:00 Introduction
0:19 Black-Scholes Model and its Limits
1:17 Volatility Changes with Time
1:27 Stochastic Volatility Models
3:57 The Heston Model
4:34 The SABR Model

#optionpricing, #quantitativefinance, #financeeducation, #derivatives, #quant, #quantnext

[ShaneSkinner-jk]

This is so clear and precise, thank you!

[guimli]

Allez fait le en français on t'as cramé ;). Je bosse pour les interviews les modéles de volatilités et c'est fou comment tu m'as fait comprendre des trucs que j'ai lu 5 fois. Merci pour ton travail

[anindadatta]

quite a few new variables added compared to black Scholes method, speed of mean reversion, volatility of the variance, correlation of the two wiener process. Even correlation of the two volatilities would keep fluctuating and not remain constant. Do All these variables increase the accuracy of volatility and underlying price prediction? Does this predict the volatility skew curve shape?

[VC-oomi]

So when would the Heston/SABR model be more applicable and more closely tied with market pricing?