Phases of MANES: Multi-Asset Non-Equilibrium Skew Model of a Strongly Nonlinear Market with Phase Transitions

This chapter presents an analytically tractable and practically oriented model of nonlinear dynamics of a multi-asset market in the limit of a large number of assets. The asset price dynamics are driven by money flows into the market from external investors and their price impact. This leads to a model of a market as an ensemble of interacting nonlinear oscillators with the Langevin dynamics. In a homogeneous portfolio approximation, the mean field treatment of the resulting Langevin dynamics produces the McKean–Vlasov equation as a dynamic equation for market returns. Due to the strong nonlinearity of the McKean–Vlasov equation, the resulting dynamics give rise to ergodicity breaking and first-or second-order phase transitions under variations of model parameters. Using a tractable potential of the Non-Equilibrium Skew (NES) model previously suggested by the author for a single-stock case, the new Multi-Asset NES (MANES) model enables an analytically tractable framework for a multi-asset market. The equilibrium expected market log return is obtained as a self-consistent mean field of the McKean–Vlasov equation and derived in closed form in terms of parameters that are inferred from market prices of S&P 500 index options. The model is able to accurately fit the market data for either benign or distressed market environments, while using only a single volatility parameter.