Work

Estimating Stable Fixed Points and Langevin Potentials for Financial Dynamics

Year: 2023

Type: preprint

Abstract: The Geometric Brownian Motion (GBM) is a standard model in quantitative finance, but the potential function of its stochastic differential equation (SDE) cannot include stable nonzero prices. This article generalises the GBM to an SDE with polynomial drift of order q and shows via model selection that q=2 is most frequently the optimal model to describe the data. Moreover, Markov chain Monte Carlo ensembles of the accompanying potential functions show a clear and pronounced potential well, indicating the existence of a stable price.

Source: arXiv (Cornell University)

DOI: 10.48550/arxiv.2309.12082

Authors: Wand, Tobias, Wiedemann, Timo, Harren, Jan, Kamps, Oliver

Institution: University of Münster

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funders: Studienstiftung des Deutschen Volkes, Westfälische Wilhelms-Universität Münster

OpenAlex ID: W4386977768

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