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Heston Variance Process

Hard · Stochastic Calculus · Quant Trader interview question · Heston, Stochastic Volatility, CIR, Cox-Ingersoll-Ross, Stochastic Calculus, Variance Process

In the Heston model, the variance process, $v_t$, is modeled as: $dv_t = \kappa (\theta - v_t) dt + \xi \sqrt{v_t} dW_t^v$ where: $\kappa$ is the rate of mean reversion. $\theta$ is the long-term mean of the variance. $\xi$ is the volatility of the variance. $dW_t^v$ is a Wiener process (Brownian motion) correlated with the price process. Identify the well-known stochastic process that the variance $v_t$ follows.