Role of noise in a market model with stochastic volatility |
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Authors: | G Bonanno D Valenti B Spagnolo |
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Institution: | (1) Dipartimento di Fisica e Tecnologie Relative, Group of Interdisciplinary Physics, Università di Palermo, Viale delle Scienze, 90128 Palermo, Italy |
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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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Keywords: | 89 65 Gh Economics econophysics financial markets business and management 02 50 -r Probability theory stochastic processes and statistics 05 40 -a Fluctuation phenomena random processes noise and Brownian motion 89 75 -k Complex systems |
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