medium · Quantitative Finance
In the Ornstein-Uhlenbeck (OU) stochastic differential equation given by dX_t = κ(θ - X_t) dt + σ dW_t, what is the primary role of the parameter κ?
- The speed of mean reversion.
- The diffusion coefficient that determines the path's continuity.
- The long-run level toward which the process reverts.
- The instantaneous volatility of the process.
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