Role of noise in a market model with stochastic volatility

DOI10.1140/EPJB/E2006-00388-1MaRDI QIDQ978895zbMATH OpenOpenAlexWikidataFDO

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)

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

Mathematics Subject Classification ID

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

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.

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Cited in

(46)

• Roles of capital flow on the stability of a market system
• The roles of mean residence time on herd behavior in a financial market
• Filtering for partially observed diffusion and its applications
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