hard · Quantitative Finance derivatives
When calibrating a Heston stochastic volatility model, a practitioner identifies the following parameters: κ = 2.0, θ = 0.04, and xi = 0.5.
Does this calibration satisfy the Feller condition, and why does this matter?
- No, because the correlation ρ must be negative to satisfy the condition.
- No, because 2κθ < xi^2; the variance process can reach zero.
- Yes, because 2κθ = 0.16 which is greater than xi = 0.5.
- Yes, because κ θ > xi; the process is stationary.
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