What is stochastic volatility?

What is stochastic volatility?

Approach: Define volatility as stochastic process.

Models where volatility itself follows stochastic process. Example: Heston model dS = μS dt + √v S dW₁, dv = κ(θ-v) dt + ξ√v dW₂, with correlation ρ.

Follow-up: How to price options?

Key concepts: volatility process, mean reversion, leverage effect.