A tractable model for indices approximating the growth optimal portfolio

Baldeaux Jan (), Ignatieva Katja and Eckhard Platen ()
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Baldeaux Jan: Finance Discipline Group, University of Technology Sydney, Australia
Ignatieva Katja: School of Risk and Actuarial Studies, Australian School of Business, University of New South Wales, Sydney, Australia

Studies in Nonlinear Dynamics & Econometrics, 2014, vol. 18, issue 1, 1-21

Abstract: The growth optimal portfolio (GOP) plays an important role in finance, where it serves as the numéraire portfolio, with respect to which contingent claims can be priced under the real world probability measure. This paper models the GOP using a time dependent constant elasticity of variance (TCEV) model. The TCEV model has high tractability for a range of derivative prices and fits well the dynamics of a global diversified world equity index. This is confirmed when pricing and hedging various derivatives using this index.

Keywords: growth optimal portfolio; constant elasticity of variance model; kernel estimation; diffusion coefficient function; derivative hedging (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1515/snde-2012-0054

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