Heston Model
The Heston model is a mathematical model used in quantitative finance to describe the evolution of volatility in financial markets, particularly for pricing options. It extends the Black-Scholes model by allowing volatility to be stochastic (random) rather than constant, using a mean-reverting square-root process. This makes it more realistic for capturing market phenomena like volatility smiles and skews observed in option prices.
Developers should learn the Heston model when working in quantitative finance, algorithmic trading, or risk management systems that require accurate option pricing and volatility modeling. It is essential for building financial software that handles derivatives, as it provides a more flexible framework than constant volatility models, allowing for better calibration to market data and improved risk assessment in volatile conditions.