Analysis of market weights under volatility-stabilized market models

DOI10.1214/10-AAP725zbMATH Open1225.60136arXiv0904.0656OpenAlexW3102332753MaRDI QIDQ549872FDOQ549872

Authors: Soumik Pal 

Publication date: 19 July 2011

Published in: The Annals of Applied Probability (Search for Journal in Brave)

Abstract: We derive the joint density of market weights, at fixed times and suitable stopping times, of the volatility-stabilized market models introduced by Fernholz and Karatzas in [Ann. Finan. 1 (2005) 149-177]. The argument rests on computing the exit density of a collection of independent Bessel-square processes of possibly different dimensions from the unit simplex. We show that the law of the market weights is the same as that of the multi-allele Wright-Fisher diffusion model, well known in population genetics. Thus, as a side result, we furnish a novel proof of the transition density function of the Wright-Fisher model which was originally derived by Griffiths by bi-orthogonal series expansion.

Full work available at URL: https://arxiv.org/abs/0904.0656

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zbMATH Keywords

stochastic differential equationdiffusion processWright-Fisher diffusionFleming-Viot diffusionBessel-square processmarket weightsvolatility-stabilized market model

Mathematics Subject Classification ID

Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Diffusion processes (60J60) Auctions, bargaining, bidding and selling, and other market models (91B26) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Transition functions, generators and resolvents (60J35)

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Cited In (17)

• Asset prices in segmented and integrated markets
• Polynomial processes in stochastic portfolio theory
• Optimal arbitrage under model uncertainty
• Diffusions on a space of interval partitions: the two-parameter model
• Ranked masses in two-parameter Fleming–Viot diffusions
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