Stochastic volatility models capture the dynamic nature of volatility in financial markets by allowing it to fluctuate randomly over time, unlike constant volatility models. These models are crucial for accurately pricing derivatives and managing risk, as they better reflect the observed behavior of asset prices in real markets.

Stochastic Volatility

Stochastic volatility models are used in financial mathematics to capture the random nature of volatility in asset prices, which is not constant over time. These models improve the pricing and hedging of derivatives by allowing volatility to be driven by an additional stochastic process, often correlated with the underlying asset's price process.

Stochastic volatility models

dynamic nature of volatility

Financial markets are platforms where individuals and institutions can trade financial securities, commodities, and other fungible items at prices that reflect supply and demand. They play a crucial role in the economy by facilitating liquidity, price discovery, and the efficient allocation of resources.

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