The probability distribution of returns in the exponential Ornstein-Uhlenbeck model

DOI10.1088/1742-5468/2008/11/P11013zbMATH Open1456.91127arXiv0805.0540OpenAlexW3099656275MaRDI QIDQ5239449FDOQ5239449

Authors: V. Cazzola, Guido Montagna, Oreste Nicrosini, Giacomo Bormetti 

Publication date: 22 October 2019

Published in: Journal of Statistical Mechanics: Theory and Experiment (Search for Journal in Brave)

Abstract: We analyze the problem of the analytical characterization of the probability distribution of financial returns in the exponential Ornstein-Uhlenbeck model with stochastic volatility. In this model the prices are driven by a Geometric Brownian motion, whose diffusion coefficient is expressed through an exponential function of an hidden variable Y governed by a mean-reverting process. We derive closed-form expressions for the probability distribution and its characteristic function in two limit cases. In the first one the fluctuations of Y are larger than the volatility normal level, while the second one corresponds to the assumption of a small stationary value for the variance of Y. Theoretical results are tested numerically by intensive use of Monte Carlo simulations. The effectiveness of the analytical predictions is checked via a careful analysis of the parameters involved in the numerical implementation of the Euler-Maruyama scheme and is tested on a data set of financial indexes. In particular, we discuss results for the German DAX30 and Dow Jones Euro Stoxx 50, finding a good agreement between the empirical data and the theoretical description.

Full work available at URL: https://arxiv.org/abs/0805.0540

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zbMATH Keywords

stochastic processesmodels of financial markets

Mathematics Subject Classification ID

Economic time series analysis (91B84) Statistical methods; risk measures (91G70) Stochastic methods (Fokker-Planck, Langevin, etc.) applied to problems in time-dependent statistical mechanics (82C31) Stochastic models in economics (91B70)

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Cited In (6)

• The likelihood of various stock market return distributions. I: Principles of inference
• On the probability distribution of stock returns in the Mike-Farmer model
• Prediction of the stock prices at Uganda securities exchange using the exponential Ornstein-Uhlenbeck model
• Comparison between the probability distribution of returns in the Heston model and empirical data for stock indexes
• Statistical analysis and stochastic interest rate modeling for valuing the future with implications in climate change mitigation
• Pricing renewable identification numbers under uncertainty

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