Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/62176
Authors: 
Platen, Eckhard
Year of Publication: 
2000
Series/Report no.: 
Discussion Papers, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes 2000,91
Abstract: 
The paper proposes a financial market model that generates stochastic volatility and stochastic interest rate using a minimal number of factors that characterise the dynamics of the different denominations of the deflator. It models asset prices essentially as functionals of square root and Ornstein-Uhlenbeek processes. The resulting price processes exhibit stochastic volatility with leptokurtic log-return distributions that c1osely match those observed in reality. The resulting index of the market is negatively correlated with its volatility which models the well-known leverage effect. The average growth rates of the different denominations of the deflator are Ornstein-Uhlenbeek processes which generates the typically observed long term Gaussianity of logreturns of asset prices.
Subjects: 
stochastic volatility
financial market model
derivative pricing
square root process
JEL: 
G10
G13
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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