IDEAS home Printed from https://ideas.repec.org/p/uts/ppaper/1996-3.html
   My bibliography  Save this paper

Principles for modelling financial markets

Author

Abstract

The paper introduces an approach focused towards the modelling of dynamics of financial markets. It is based on the three principles of market clearing, exclusion of instantaneous arbitrage and minimization of increase of arbitrage information. The last principle is equivalent to the minimization of the difference between the risk neutral and the real world probability measures. The application of these principles allows us to identify various market parameters, e.g. the risk-free rate of return. The approach is demonstrated on a simple financial market model, for which the dynamics of a virtual risk-free rate of return can be explicitly computed.

Suggested Citation

  • Eckhard Platen & Rolando Rebolledo, 1996. "Principles for modelling financial markets," Published Paper Series 1996-3, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    • Handle: RePEc:uts:ppaper:1996-3
    as

    Download full text from publisher

    File URL: https://www.cambridge.org/core/journals/journal-of-applied-probability/article/principles-for-modelling-financial-markets/DED14C124719681D424BFA398BB8E254
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Eckhard Platen & Martin Schweizer, 1998. "On Feedback Effects from Hedging Derivatives," Mathematical Finance, Wiley Blackwell, vol. 8(1), pages 67-84, January.
    2. Bjork, Tomas, 2009. "Arbitrage Theory in Continuous Time," OUP Catalogue, Oxford University Press, edition 3, number 9780199574742.
    3. Wolfgang Hardle & Torsten Kleinow & Alexander Korostelev & Camille Logeay & Eckhard Platen, 2008. "Semiparametric diffusion estimation and application to a stock market index," Quantitative Finance, Taylor & Francis Journals, vol. 8(1), pages 81-92.
    4. Chen, Bin & Hong, Yongmiao, 2012. "Testing For The Markov Property In Time Series," Econometric Theory, Cambridge University Press, vol. 28(1), pages 130-178, February.
    5. Marco Scarsini & Yossi Feinberg, 2003. "Rate of Arbitrage and Reconciled Beliefs," Economics Bulletin, AccessEcon, vol. 4(11), pages 1-12.
    6. W. H. Fleming & S. J. Sheu, 2000. "Risk‐Sensitive Control and an Optimal Investment Model," Mathematical Finance, Wiley Blackwell, vol. 10(2), pages 197-213, April.
    7. Huyên Pham, 2003. "A large deviations approach to optimal long term investment," Finance and Stochastics, Springer, vol. 7(2), pages 169-195.
    8. Stein, Jerome L., 2010. "Alan Greenspan, the quants and stochastic optimal control," Economics Discussion Papers 2010-17, Kiel Institute for the World Economy (IfW Kiel).
    9. Joao Amaro de Matos & Joao Sobral do Rosario, 2000. "The equilibrium dynamics for an endogeneous bid-ask spread in a monopolistic financial market," Nova SBE Working Paper Series wp389, Universidade Nova de Lisboa, Nova School of Business and Economics.
    10. Eckhard Platen, 1999. "Axiomatic principles for a market model," Published Paper Series 1999-3, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    11. Jerome L. Stein, 2009. "Application of Stochastic Optimal Control to Financial Market Debt Crises," CESifo Working Paper Series 2539, CESifo.
    12. Stein Jerome L., 2011. "US Financial Debt Crisis: A Stochastic Optimal Control Approach," Review of Economics, De Gruyter, vol. 62(3), pages 197-217, December.
    13. Jerome L. Stein, 2010. "A Critique of the Literature on the US Financial Debt Crisis," CESifo Working Paper Series 2924, CESifo.
    14. Schweizer, Martin, 1999. "A minimality property of the minimal martingale measure," Statistics & Probability Letters, Elsevier, vol. 42(1), pages 27-31, March.
    15. Augusto Felício, J. & Rodrigues, Ricardo, 2015. "Organizational factors and customers' motivation effect on insurance companies' performance," Journal of Business Research, Elsevier, vol. 68(7), pages 1622-1629.
    16. repec:ebl:ecbull:v:4:y:2003:i:11:p:1-12 is not listed on IDEAS
    17. João Amaro De Matos & João Sobral Do Rosário, 2002. "Market Power And Feedback Effects From Hedging Derivatives," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 5(08), pages 845-875.
    18. Marco Avellaneda, 1998. "Minimum-Relative-Entropy Calibration of Asset-Pricing Models," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 1(04), pages 447-472.
    19. Chiarella, Carl & Gao, Shenhuai, 2004. "The value of the S&P 500--A macro view of the stock market adjustment process," Global Finance Journal, Elsevier, vol. 15(2), pages 171-196, August.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:uts:ppaper:1996-3. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Duncan Ford (email available below). General contact details of provider: https://edirc.repec.org/data/sfutsau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.