Scribd Logo
Upload

Welcome to Scribd!

  • 16 views

    Models of Asset Dynamics - CH 11 of Investment Science

    Uploaded by

    Pixi

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content

    You might also like

    Models of Asset Dynamics - CH 11 of Investment Science

    Uploaded by

    Pixi
    16 views23 pages

    Original Title

    Models of Asset Dynamics - Ch 11 of Investment Science

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    16 views23 pages

    Models of Asset Dynamics - CH 11 of Investment Science

    Uploaded by

    Pixi

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 23
    MODELS OF ASSET DYNAMICS mpd mete Aten val, debt dom ides ex I inan evista of ible iret aes, and ae sect a com ‘avy of eer unceaes, The hater ities the sty of chives mets y sowing howto me sat pce ettins conven al els “Tis chapter treo conans no invent pine as sd Rae i noaces the mathemati mode hat frm he unde fer he anaes developed a ae. ptr. "Poo primary del pe te se 0 epee et yun: Hol ates and lo prc, Bis latices ae alyclly simpler an Ho process, td Tey provide an exelent bse fo crmpataonal mock asocated with invesinet ‘robleme For thee reaone iis het totaly nomial lace ods fst. The nperan investment seme can all be exes in fem ofthese mods, ad Inay mal ivesners protic can be formulated and solve ring the somal Uae framework. Indeed, rough 0 of the materia nor chaps presente intone of il ice meee, to process ae more eli tha broil tice mall i be ese that they hives contin of pile ack pcs seach ist 0. proces Intel solo some poblm ose altel owl company. “They aloe provide te foundation locos nomi tie mdse tern onset manner. Fo hese estes Ko pres dels re fede oan robs, Fur copes understanding of inverient pcp, pot 0 ders ose model "The organiza of this chapter asd on the preceding viewpoint concerning the roles of flere mle Te issn present the bic ace mee fee. With is focrond mw ofthe tr ater ches can be staid ‘Therefore you may wih fo fea oly this st scion ad fen skp 6 the ex caper 11a BINOMIAL LATTICE MODEL 297 "To somsiing cto conier model tat hve 4 cnn of rice vals. ‘These mids are developed progressively from dees mel (0 continu te modes bsed ono processes 11.1 BINOMIAL LATTICE MODEL “To defi s bine tice model a base peso length ie esblobed (ack at {wes Actoding tothe model te pce s known al he hepaing ol pe shed. the pce the begining of te ae psd sone af ely to pose vas, ‘Usullythes two posites ae defied to be lies ete pe the ee cu peiod—a mall (fr op) and smal doe dwn). oth wan ae ve. wih a> apd (sully) = 1 Hence if he pie» the esinng of & ses ae p and 1~ p. specie fo some given pobailtyp. 0 p= | ‘That af he cent pice is Ss thre «probably pth the new pec wll be 1 anda probity {= p tha i wl be d8, This ode semis ofr Seve eis “The general fom of sch aie sown in Figs 11. The tok price canbe ‘salad ar moving fom ne pasa aha det The probaly am [ST p. Altice ithe apopiteSaucre tts case, ee han awe, Deaese an up oven! flowed ty a down seta © «down lowed by an yp. Bath rice ad ies the pe. ‘The model my aft sem to simple Bente permits en wo posible ‘ale t he next period. But he pero length smal nan vals are posible her evel dot ep, 50° URE 1. um ace a ml ch CS SS 28 ‘Chapter 11 [MODELS OF ASSET DYNAMICS “To sity he model completly, we must select values fer sd d ad the slip. Those should he cose mech ey at he eu chase ne of the sok fs coped hl on posible, a il be discus sue be model r mua i ate (hee val being WS ord, wih w= Ord Oh the pce wil ever become naive Its therfore pose sie Helga of pce a «funda varable. Foe esos cased i Iter stone the oth sin fost ery hep and dso spl omar for selecting the parame “Acer, die te expected yey growth ue! Specialy, = ELinSr/S] wate he tl stock prise and Sy he pace the ea f yar ‘Likewise, we deine a the eat standard deviation. Spec, o = ve ts} Ie poi length of chose, which sal empred I. he parmees ‘of te tna atic cm be sleek erase my With his oie, the iene wil closely mache vals of v and | (ax sown ley ta te expected gros ate of InSite nomial mal Will te mal an the vate of te le ery 0? The nes of he math Sgeves fr made salle, bsoming exact a At Boe Lo 0 ‘Example 11.1 (A volte stock) Consider stock withthe pants = 15% and fo as, We wish 0 make binomial mol fae on weekly pes. Accodng aL, west we eM aos, d= fu = 9505 “Te late fr thi example i shown in Figure 112. suming sc, ‘We al rr 0th ini tice ner i chap flr staying modes ‘ht allow a contin of prise Te biome il be found 1 be a sta proximation 0 tee modes Reaer a a = eh we a M12 THEADIMVE MODE 299 11811 CURE 12 Late fr ample 1.4. Te {Be ofthe part of pc nde sonar ot 11.2 THE ADDITIVE MODEL ‘We now study odes with the property that pce can age ovr a somtna, Fst we shal consider discreesine mde, Dai with i aie nel of this ‘etn, an then ter we sl oni comlnuns te models defini peo ‘Let focus on +1 epi, idesed by f= 0.1.2... We abo focus oma pti ae tt x catered by 2 pice a ec tie pie at tie is dete by SG). Ou sda wl eognize hat he rice in ny ee ‘ependen fo some exet on pesous poses "The spent mle he ade model, S41) =asity Hui) any for k= 0.1.2... Ins equation @ 6a const sly & > 1) and the ‘gnmden wl) 0, N= lea radon vale Tew) can toot ‘St shocks” or “nahances” tar ae the pce to fate. To ope ort this model an inal pice (0) s specie thn once th ado vale 0) ve, (1) can be detrmined The process te eps pgs in pie Iason, determining S12), 513). U4). “The key ingeict of hs model the sequence frank varies wd), k= 1.2... We ase that hese ae tly sly depen ‘Note ta he pice at ay time depends only he sce at he at eet previous te and the random surance. It dics nt explily sepe ser previous pcs 300 Chapter 1 MODELS OF ASSET DYNAMICS Normal Price Distribution 1 irae tose explicit for a few of he pies fen (11.2). By dice S01) = 2510) +400) 592) = asin) Hutt) #5) + ou) + 40) By simple indsion it cn be sen that or oneal SH)= eS 40M) 4a UCD. 113) Hence S(t is S10 ps the sum of andor vale rue we sue thatthe rar vassal), = Of yo. 8 — are indepen vals with common vias oT, ie Tear stanton of ta randval i lo normal see Append A, felons fo (113) tht SH) sel apron vale TE the expected sees of ll the ws are zr, ten Uo expected vate of sibs E{sih]=6450), ‘Wen > 1. ths od has the property th the expected vale tthe pice intenses tome at according oe) ned te constant asthe roth ate act ‘tthe mel “te aie model actully simple and easy t wor wth The expected ‘alae oF ie pws geome and lpi ar oral amo variables Ho ‘er tient ely aod hse aks resem. Nowa ro vale ‘av take on agave values, which ers bat the prices inthis model righ ene ‘Svea well but el sock pcs are never sega. Fueror, ia sok were 1 begin ta price of sy, $1 wih a oss, $0 and en i upward toa pice ‘of SIM, soem very anikely ta the woud emain a 880 1 sore They tt he wanda devon wold be proportional or these ess he eo af erage apt a ew months fr com fs a fl haling block fora sds, bt caot Be ed tone ar an ongoing sme repreteting lng: ited ey futons. For the rason we ma considers ter lev, which the ukiplitve ode (However oar spdenanding of te adve model will einer ft moe mee ml) 11.3. THE MULTIPLICATIVE MODEL ‘The mulpleatve mds the form au Oke Hae i te RH = 01,2... — Beate 113 THE MULTIPUCATIVE MODEL 301 ‘dependent ofthe oer magne of $4), sa inepenen ofthe ois of fe Fo example, if we change nis fr US liso Can ch he ela Die change i i a “he mulipisive mel aks fai form if eet sta esta of both ses ofthe equation. This yes Insi-+1) tes) How) as) foe k=0.1,2,..§— 1. Mec thi frm the ml f the adive sp with spect to the loath ofthe pice ater a the pce tl. Therefre we can ‘ur knowledge af he ive ode wo ale the maleate model Tes mow natal wo spe the tandom estas ety interns of te Ih. paar we fee i "We an expres te ol rupcatvedsurbances as mo eg. 1.2... — 1. Each ofthe vari om: esate vais Altoh he normal vais wi) ma Be Aegis De comping) ate by C18) ays ive. Since thera factor by which «poe nied w(t follows ta fin ein poste in this mee Lognormal Prices ‘The sacesive pies ofthe mulpinive model can be easy found tobe “Tobin the atl ogi of his exdion we Bd tasty Tie ten ATED. and ne Sie the sum of normal ano vale Ase «ol tao aie ne sae aaa gS mm ew 302 Chapter 11 MODELS OF ASSET DYNAMICS Wich i) bt exposed ve 9) =» and variance a? ad al se aly ‘depend then we Ed in] = ns10) +o ait var si) = ko aL ce oth be expected vale andthe variance ines nari With Real Stock Distributions Aspnes stra 0 ako wel his borin malts clock pie {ein Are rea ck pes legnormal” records SD ‘To wry is, we scesa nomial pura nah ost, 1 weck ad eord tbe erences atk Ii omy as RS = We then onset ogra of hes aut and compare | [enh th of nom sirton of the same variance. Typical, be messed ‘busin i te hose to being nom eeep atte obser dbus ote issih sale neu the mean age at extenely lel eer pone ‘negative lrg alts), The ight change In shape i pce termed fat tai (See Figure 113) Te bseed stibuin is ene ls dan 3 nena mae UNE 1.3, me rin oti fam nn ie [egy Sosa anon f Amon Ain wes i a cmc ye pa Stune Augns ake iowa sey males me mae 11otTVPICAL PARAMETER VALLES" — 303 ston. This imps at age pce changes end o Sawa ee ‘rely than would be pected by s rma Staton othe se vane: For ‘ow aplictins (et oe al) this ght span notion 11.4 TYPICAL PARAMETER VALUES" ER en ee an ich ie tbe maltese atl seal ot) Tea MM eo ng reno sent nt tev of SOD 8 Type es of es pare for at nw commons ot ‘ener om or ole oregon Tar so Syste of lal @ = er) te We hea he Iogth of «pio year the pid eg es hn 2 year, these Tales see downward? tht 5 aU. The values can te exited fro hit rsode in he stad ahion (ut with caso a to he vali of thse sites, tas la Chapter 8) we ave N+ me pit of dts, spanning W eros the esimato he sage ped u [SE] =2 Baas 0s = nfs ss | ence al that mater thet Feast othe st rice, “The standard estimate fo is meal} si tin tn pte, en et ti cn cn a sat) = sd foo? itis aeming wt is vomal va?) 204 =, TOS ESE eget ee an og os De 4204 Chapter 11 MODELS OF ASSET DYNAMICS ene fo the vals astumed erie, mamely, v= 2 an = IS, we Bnd sha 1 yeas of dat ete to rece the standard devion of he site of ‘0 (ihe a stable fraction of the te ae). On te teh, with aly T year of weekly dita we can obi aly good esate? of 11.5 LOGNORMAL RANDOM VARIABLES t EE inc — a minicar: SEE operat a ‘Sexier tet sy up pops of chan } he eal pea be poly ds og aon aie Una Fp Lt ee tbe ve age one ad Stites toe Sar itl eed ae Wed aio Wa tue etd ae tte Ack po ges br ey per On sb Grate as “Thiet cane tel wes by nog tat pressed te lognormal isrton wil spend ov Ian sped downward blow ao, at ican Sead Upward unbound. Hence the mean value increases 8 Beene. "Te exe on sctal fly sal fr low-olattysxks,Forexampe, conser «sch with yeny @~ 12 an yeuty oof 1. The comet erm CURE 11.4 perma oan Teer PSs sae oars Sov etad 220 3 a gat LIE aT ear ~ sr Mee ae 11.6 RANDOM WAIKS AND WIENER PROCESSES. 305 Jo = 0025, which esa compare 1. For socks wit ih vali, homer, ‘he caestion canbe signin, 11.6 RANDOM WALKS AND WIENER PROCESSES. 20 7 TTT ns. ee te ae cal er ea pie ae pelea ow 7D ARTE cise be ative process = 00+ aie) icoerera au for F = 0.1.2. this races istered random alk tes estos is ith ean Oars I tandem ‘andom varabe. These random varies ae mull world ht foc; )etnd] =O for j Toe proces stated by sting 2) 0. Toes 9 cua eine path wanders sound acorn othe hupesanc te rand ‘arabes et). [The reson for sing Vn (1) wl Become a sho | A Picola ph fa anom wale x sown in Pi 15, ‘OF special rest are the ference ror vais ‘We cn wt sich dirty a ) =e) for j 0) = Fev “This 62 nomal random varie aca he sm of rom nda vibes. WWevlad medial that Bla) stn) ‘rete doneion! by ora nd a 306 Chapter 11 [MODELS OF ASSET DYNAMICS As, wing the independence of he 4 We Had vara) “201 [eas] feo ste par = ann he poins, This clan aso > ee fad lk ht A would appear the aint, Tt Should te cla ta he fleece vals scat with two dierent time ines e nce the two nerve ae ponoveoping. Tat if ety = fata sg) 2) coe with 2 hte donne i ich 'A Wiener proces Tit AE noon walk proc (419) as At» in symbolic form we write he equaon governing a Winer process as a= aun ‘where each ct staatized pomal random vibe, The om variables’) de) ae ncoelted whenever” 4 “Th dear of «Wiener paces sot gprs Beate We he aS sac ht the ting operon re dobed: ut roves a pad tue sep ‘ho, A alleen of 2 Winer proces an be mae by inp sig the ‘ie proper In te approach we ys ross £0) fsa Wiener procs (c- Shermvly. Brownian motion if sates the flowin 1. For ny <1 the quanti z¢)~ 2) ts arma and Yate wih mean 20 tnd wage 2. For ny 0 <1) © the ado vases (and (4) = 2) ‘iv unconelaed Ha) =0 with probly | “Thee popes paral! the popes ofthe rao walk prs given ex. in fn ty to vue de come of « Wiener pres Aske of 2 wile pth estown ie gue 116, Remember ht given 20) tne rth ale {8 sG) ate +> 1's, on average the sme a5) bt lve otha! acing to. standard deviation eal 10 5=7 11.6 RANDOM WAIKS AND WIENER PROCESSES 307 | Wiener gross smo ifeenale with eget fine We can rough sent this by ating at for = fo] ly sat | ao T5,bowever, wef wo fave word for he tm s/t ice his expeesson appear in many Sota egusions Aceon word wed sig fom the sem ‘Huosrng ell (ihe fel that moat Wieners woe) whe nee. realy Fan ory to visualize white wise One deption i preset Figure 17 Generalized Wiener Processes and Ito Processes ‘The Winer poss (r Brownian matin) the ndamentlbulig Bok fr 3 ote cllacton of more sen process, Thee geuiatne are caine! by Insering white nie in an onary dif eqeion “Te simplest enesion of ts Kind ithe generale Wlener proces which ls of te fom de( sags dae an) 2008 Chapter 11 MODELS OF ASSET DyNAMUCS where) 3 rd varie fo eae 1, «Wiener process ada and ae ‘A seeraied Wiener proces i spec pot ects has a analyte solu ich can be foun by neratng bth ses. Spsialy, a) = 10) Fart be, any An Mo proces is sma ore gee stil Suc a poss is estibed by so etion the frm se = ate 1) de ay As hfe: denctes a Wiener process. Now, However. he cei a(t) and (1) my depend on and ad» ge solution cannot writen nan analy foxm, A sfc fom of Tio prcess i wed frequent to decrbe he behave of fanless a cused nthe next section 11.7 A STOCK PRICE PROCESS ‘We now have he ns nesesry feted the mipictive mode of stock prices tor sontouou-tne nol Resl at te muse moe Insik-+ 1) =In5ik) = wie) whee he (fe uncon anal random aril Th continuous ie ver lomo his equation is v Aint) = var pode aut where ad 0 are contams nd ex snd Wiener ross. The whole and sis ofthe equation cn be eared pain he tle theta arable Wein the eine model Tose cane thought of ost ps ema ‘noo varie wih a0 mean, and hence veal i 2 oma fads arabe ‘hiiugh alert othe ston ae feels males of eiferenal ed ‘hue do not thncles have nage nthe dsl some te Bp fo ak of Ara det beng“ ie Stand A) The erm cory he west ‘eof te rphehag ide "Thr mea value i proportions od. conser {he fat tht inthe optim veson ofthe zane moe the mean vale of tbe chung i nt popotna oe ent of one period. Te star deviation of he haa sd 9 ties the Sada deviation of de. Rene sof ener of ‘spice o/, which conten with he ft that fe gai verso of the ulate mde he wand deviton ofthe change In 5 propecaa to te ater ofthe length of oe peri, rected by (1.7) and 17. Sis enon 115} exes ema fn) sactalyageoeraied ‘Wiener proces Hence we cat save exp ng (1.13) a8 5() = 1n50) +48 Hast, ats) “Tis shows tat Fa Sl} = Ells) +, and ence Ela) grows tinal with {cate the expected logit ofthe pes cess bly ih at 32 117 ASTOCK PRICE PROCESS 209 “oaeaouly compounded ek acount hs procs stem geometre Brownian Lognormal Prices Lite the dice sine mite model, the pom Brownian meson process scribed by (115) logo ress Thi can be sec eal from he sod {IL16) The ghd side fat exuaton oma randon var wih expe "ale in (0) + a stand evan o 7. ‘We conlice ta the pice Sv) Hl ha 8 fopnorsl ation We can exes this formaly by 947 ~ (4 S(O) + oF 70, me Nl, o°) denotes the ‘sera itn th men and vice 0 ‘Altiough we can wee S() = expe So) = S(Oenpor +9) does nr follow tthe expeted value of 5() 8 (0) The mes vale mas intend te ‘Atenitd by qution (118 te general ems at pia lognormal vari Hence 1509) = ont He define «= 94 Jo, we ane E(SU9] = Sie" “The standard devistion f S¢) sao sven By a gener ration fr lognorsl ‘aval: nthe ese ofthe standard deviant eq aula 4 it moe Complex. The formula is (ce Execs 5) sident ste = Saye" er* Standard Ito Form We vedi the random roses fo Sin ems of InSite dey In tens of 5), The we a ln) fica the development, and ih te Tact ta the process Slgorand generation abe malphcatve mel that ead o lognormal dstabtons I towever, ual exes he aces terms of S10) ell Im nary cleus we Kw tht ase s ence we might be tempted subsite S/S fo dln i) in he base eustion {Eq (115) abining 450) St) = va +o dis Wook be sist comet ba ‘here sacreston ee tht us be applied when changing ables oo process (Gecase Wiener processes ae oot ony Functions ad de ot Fw the rales of fori calcla) The appropiate proces nero $1) 8 ml oun ates) = x10 Chapter 11 [MODELS OF ASSET DYNAMICS Noe it the cneton tn Lo? is eat he same as aed in he expression for the expected vale ofa logeomal dom vars. Ping = + fo, we may ‘rite the ston i th tnd o form for pie yumi, asin $0

    You might also like