Economics at your fingertips  

Multiple Subordinated Modeling of Asset Returns

Abootaleb Shirvani, Svetlozar T. Rachev and Frank Fabozzi ()

Papers from

Abstract: Subordination is an often used stochastic process in modeling asset prices. Subordinated Levy price processes and local volatility price processes are now the main tools in modern dynamic asset pricing theory. In this paper, we introduce the theory of multiple internally embedded financial time-clocks motivated by behavioral finance. To be consistent with dynamic asset pricing theory and option pricing, as suggested by behavioral finance, the investors' view is considered by introducing an intrinsic time process which we refer to as a behavioral subordinator. The process is subordinated to the Brownian motion process in the well-known log-normal model, resulting in a new log-price process. The number of embedded subordinations results in a new parameter that must be estimated and this parameter is as important as the mean and variance of asset returns. We describe new distributions, demonstrating how they can be applied to modeling the tail behavior of stock market returns. We apply the proposed models to modeling S&P 500 returns, treating the CBOE Volatility Index as intrinsic time change and the CBOE Volatility-of-Volatility Index as the volatility subordinator. We find that these volatility indexes are not proper time-change subordinators in modeling the returns of the S&P 500.

Date: 2019-07
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) Latest version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in Papers from
Bibliographic data for series maintained by arXiv administrators ().

Page updated 2019-10-05
Handle: RePEc:arx:papers:1907.12600