medium · Quantitative Finance derivatives
A Heston stochastic volatility model is calibrated with κ = 2.0, θ = 0.04, and ξ = 0.50.
Does this calibration satisfy the Feller condition, and what is its significance?
- Yes, since 0.16 is greater than or equal to 0.25, variance is guaranteed to remain strictly positive.
- No, because the mean-reversion speed parameter κ must exceed a value of 5.0 for the condition to hold true.
- Yes, the Feller condition holds simply because the long-run variance parameter θ is strictly positive by assumption here.
- No, 0.16 ≥ 0.25 is false, so the Feller condition is NOT satisfied. Significance: variance can reach zero.
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