Stochastic Volatility Models

The Black-Scholes model, developed by Fischer Black and Myron Scholes in 1973, treated volatility as a constant — an assumption Black Monday in October 1987 dramatically disproved. John Hull and Alan White published the first stochastic volatility paper later that year, pioneering the field. The pivotal advance came in 1993 when mathematician Steven Heston published a closed-form option pricing model that allowed volatility itself to vary randomly and correlate with asset returns, establishing the framework that dominates quantitative finance today.