Mathematical Finance Seminar
18 c.t.
TU Berlin, Room MA 313 (Straße des 17. Juni 136, 10623 Berlin)
Eckhard Platen (University of Technology Sydney)

Dynamics of a Well-Diversified Equity Index and Martingale Inference

The paper derives an endogenous model for the long-term dynamics of a well-diversified equity index with rough volatility, the S&P500. It assumes that the index is a proxy of the respective growth optimal portfolio, the variance of its increments evolves in some market time proportionally to the index value and the derivative of market time is a linear function of the squared derivative of a smoothed proxy of the single driving Brownian motion. The resulting model is highly tractable, allows almost exact simulation and leads beyond classical finance theory. Its parameters are estimated via a novel martingale inference method, which employs higher-strong order, implicit approximations of the increments of the system of stochastic differential equations.