The Heston (1993) model generalizes the Black-Scholes setting to one in which
A) Volatility itself evolves according to a geometric Brownian motion.
B) Volatility is a mean-reverting stochastic process.
C) Volatility is a mean-averting stochastic process.
D) Volatility evolves according to an arithmetic Brownian motion.

Question

Quizplus · Accepted Answer

The Heston model is known for introducing a stochastic volatility component that is mean-reverting, which means it tends to return to a long-term mean over time. This is a key feature distinguishing it from the constant volatility assumption in the Black-Scholes model.

The Heston (1993) Model Generalizes the Black-Scholes Setting to One