medium · Quantitative Finance stochastic
The Feller condition 2κθ ≥ ξ² in the Heston stochastic volatility model is critical for which numerical reason?
- It guarantees the underlying stock price process itself cannot drop below zero.
- It ensures the resulting implied volatility smile stays symmetric near the at-the-money strike.
- It prevents the variance process v_t from reaching zero, ensuring it remains strictly positive.
- It is a strict requirement for a closed-form solution of the model's characteristic function to exist.
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