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The Factorial Path-Dependent Market Model

Author

Listed:
  • Léo Parent

    (UP1 EMS - Université Paris 1 Panthéon-Sorbonne - École de Management de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne)

Abstract

This article introduces the factorial path-dependent market (FPDM) model, a multivariate asset price dynamics model in which these dynamics are determined by a set of elementary factors. In this framework, both the factorial drift and factorial volatilities are conditioned by the past dynamics of the factorial portfolios, resulting in a model mostly path-dependent. Derived from this theoretical foundation, the paper subsequently designs a market generator positioned midway between parametric models based on strong assumptions and purely data-driven approaches. The aim is to combine the best of both worlds, offering a model capable of faithfully reproducing the empirical financial dynamics while maintaining a clear understanding of the financial phenomena driven by the simulated price paths. To evaluate the effectiveness of the proposed approach, a thorough out-of-sample assessment of the market generator is conducted based on the S&P500 investment universe.

Suggested Citation

  • Léo Parent, 2024. "The Factorial Path-Dependent Market Model," Working Papers hal-04751411, HAL.
    • Handle: RePEc:hal:wpaper:hal-04751411
    Note: View the original document on HAL open archive server: https://hal.science/hal-04751411v1
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