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.
Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. It only takes a minute to sign up.Sign up to join this community
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.