hard · Quantitative Finance
In the Heston stochastic volatility model, the variance process is dv_t = κ(θ - v_t) dt + xi sqrtv_t dW_t.
For a calibration where κ = 2.0, θ = 0.04, and xi = 0.5, does the Feller condition hold?
- Yes, because κθ = 0.08 is greater than xi = 0.5.
- No, because 2κθ = 0.16 is less than xi^2 = 0.25.
- Yes, because 2κθ = 0.16 is positive.
- No, because the volatility of variance xi must be smaller than the mean reversion speed κ.
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