Stochastic Volatility Models

Stochastic Volatility Models are mathematical frameworks used to describe how the uncertainty or variability in financial asset prices changes over time. Unlike fixed models, they assume volatility—how much prices fluctuate—is itself random and can evolve unpredictably. This approach better captures real market behaviors, such as sudden jumps or calm periods, making it valuable for pricing options and managing risk. Essentially, these models treat volatility as a dynamic, unpredictable process, providing a more realistic representation of market movements and helping traders and analysts make more informed decisions.