Role of noise in a market model with stochastic volatility

DOI10.1140/EPJB/E2006-00388-1zbMATH Open1189.91113arXivcond-mat/0510154OpenAlexW3101884700WikidataQ62355561 ScholiaQ62355561MaRDI QIDQ978895FDOQ978895

Authors: J. Martínez 

Publication date: 25 June 2010

Published in: The European Physical Journal B. Condensed Matter and Complex Systems (Search for Journal in Brave)

Abstract: We study a generalization of the Heston model, which consists of two coupled stochastic differential equations, one for the stock price and the other one for the volatility. We consider a cubic nonlinearity in the first equation and a correlation between the two Wiener processes, which model the two white noise sources. This model can be useful to describe the market dynamics characterized by different regimes corresponding to normal and extreme days. We analyze the effect of the noise on the statistical properties of the escape time with reference to the noise enhanced stability (NES) phenomenon, that is the noise induced enhancement of the lifetime of a metastable state. We observe NES effect in our model with stochastic volatility. We investigate the role of the correlation between the two noise sources on the NES effect.

Full work available at URL: https://arxiv.org/abs/cond-mat/0510154

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Mathematics Subject Classification ID

Applications of statistical and quantum mechanics to economics (econophysics) (91B80) Computational methods for stochastic equations (aspects of stochastic analysis) (60H35) Trade models (91B60)

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Cited In (42)

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• Study on split-step Rosenbrock type method for stiff stochastic differential systems
• Dynamic risk resonance between crude oil and stock market by econophysics and machine learning

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