Modeling the Volatility and Expected Value of a Diversified World Index

Eckhard Platen ()

No 103, Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney

Abstract: This paper considers a diversified world stock index in a continuous financial market with the growth optimal portfolio (GOP) as the reference unit or benchmark. Diversified broadly based portfolios, which include major world stock market indices, are shown to approximate the GOP. It is demonstrated that a key financial quantity is the drift of the discounted GOP, which can be expressed explicitly using a certain quadratic variation term. Using real market approximations for the discounted GOP it is shown that its drift does not vary greatly in the long term. For a diversified world index this leads to a natural model where the discounted index is a time transformed squared Bessel process of dimension four. The inverse of the squared GOP volatility then follows a square root process of dimension four.

Keywords: world index; volatility; benchmark model; growth optimal portfolio; bessel process; square root process (search for similar items in EconPapers)
JEL-codes: G10 G13 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2003-06-01
New Economics Papers: this item is included in nep-fin and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

Published as: Platen, E., 2004, "Modeling the Volatility and Expected Value of a Diversified World Index", International Journal of Theoretical and Applied Finance, 7(4), 511-529.

Downloads: (external link)
http://www.qfrc.uts.edu.au/research/research_papers/rp103.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.qfrc.uts.edu.au/research/research_papers/rp103.pdf [301 Moved Permanently]--> http://www.uts.edu.au/node/51831 [301 Moved Permanently]--> https://www.uts.edu.au/node/51831)

Related works:
Journal Article: MODELING THE VOLATILITY AND EXPECTED VALUE OF A DIVERSIFIED WORLD INDEX (2004)
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: https://EconPapers.repec.org/RePEc:uts:rpaper:103

Access Statistics for this paper

More papers in Research Paper Series from Quantitative Finance Research Centre, University of Technology, Sydney PO Box 123, Broadway, NSW 2007, Australia. Contact information at EDIRC.
Bibliographic data for series maintained by Duncan Ford ().