Heston Model: What the Square Root Bought and What It Cost
Why This Matters The local vol model we discussed in the previous article assumes the vol is a deterministic function of spot and time, so the vol has no randomness of its own. But the market does not treat vol that way. The VIX is the market’s implied vol for SPX, and options on the VIX are themselves quoted with an implied vol, a vol of vol. The market is pricing vol itself as a random quantity. ...