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Generalized volatility-stabilized processes

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  • Radka Picková

Abstract

We consider systems of interacting diffusion processes which generalize the volatility-stabilized market models introduced in Fernholz and Karatzas (Ann Finance 1(2):149–177, 2005 ). We show how to construct a weak solution of the underlying system of stochastic differential equations. In particular, we express the solution in terms of time changed squared-Bessel processes, and discuss sufficient conditions under which one can show that this solution is unique in distribution (respectively, does not explode). Sufficient conditions for the existence of a strong solution are also provided. Moreover, we discuss the significance of these processes in the context of arbitrage relative to the market portfolio within the framework of Stochastic Portfolio Theory. Copyright Springer-Verlag Berlin Heidelberg 2014

Suggested Citation

  • Radka Picková, 2014. "Generalized volatility-stabilized processes," Annals of Finance, Springer, vol. 10(1), pages 101-125, February.
    • Handle: RePEc:kap:annfin:v:10:y:2014:i:1:p:101-125
    DOI: 10.1007/s10436-013-0230-9
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    References listed on IDEAS

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    1. Adrian Banner & Daniel Fernholz, 2008. "Short-term relative arbitrage in volatility-stabilized markets," Annals of Finance, Springer, vol. 4(4), pages 445-454, October.
    2. Robert Fernholz & Ioannis Karatzas, 2005. "Relative arbitrage in volatility-stabilized markets," Annals of Finance, Springer, vol. 1(2), pages 149-177, November.
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    Cited by:

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    2. David Itkin & Martin Larsson, 2021. "On A Class Of Rank-Based Continuous Semimartingales," Papers 2104.04396, arXiv.org.
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    4. Brandon Flores & Blessing Ofori-Atta & Andrey Sarantsev, 2021. "A stock market model based on CAPM and market size," Annals of Finance, Springer, vol. 17(3), pages 405-424, September.

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    More about this item

    Keywords

    Stochastic differential equations; Time-change; Stochastic portfolio theory; Arbitrage; G10;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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