In his paper (link), he has the equations:

b1 = k + ƛ - (ρ * σ)

b2 = k + ƛ

k is the rate of mean reversion, ρ is the correlation between the two Wiener processes, σ is vol of vol, what is ƛ?

I have yet to figure out what ƛ is.



2 Answers 2


It is on page 329 (which is the third page of the article) and represents the market price of volatility risk. I have copied below from the original article:

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That is the "price of volatility risk" (see Page 329)

When volatility can change the "attitude" of investors to these changes becomes important for pricing options. This like/dislike for vol increases is captured in the parameter $\lambda$. In practice vol goes up i.e. $dv$ is positive, in bad economic times, such as recessions, when $dC$ is negative. So $\lambda$ is negative.


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