Steven L. Heston introduced the Heston model, a stochastic volatility model in which the asset price and its instantaneous variance evolve together. The variance follows a square-root diffusion, while correlation between the price and variance innovations allows asymmetric option-price patterns.[ref]
The model is useful because richer uncertainty does not remove all analytical structure. An affine expression for the characteristic function of the log price allows Fourier inversion to recover the probabilities used in European option valuation. The resulting pricing formula includes numerical integration; “closed-form” here does not mean that every price is an elementary expression without a numerical step.[ref]
Institutional profile: www.rhsmith.umd.edu/directory/steve-heston
Portrait of Steven L. Heston
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