 Stochastic volatility

Stochastic volatility refers to the idea that the volatility of a financial asset is not constant over time but instead follows a random process. This concept is essential in financial modeling, particularly in the field of options pricing and risk management. In classical finance models, such as the Black-Scholes model, volatility is treated as a constant parameter. However, empirical observations in financial markets show that volatility can change due to various factors, including market conditions, economic events, and investor behavior.