Calibration and Parameter Estimation in Models › Key Parameters

The key parameters for the Heston model are:

• $v_0$: Initial variance. The starting level of the variance process.
• $\kappa$: Mean reversion speed of variance. Determines how fast variance returns to $\theta$.
• $\theta$: Long-run average variance. The conditional mean approaches this level while variance continues to fluctuate.
• $\xi$: Volatility of variance (vol-of-vol). Controls the variance of the variance process itself, affecting the smile curvature and kurtosis.
• $\rho$: Correlation between the asset price and variance processes. Controls the skew of the implied volatility surface.