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A tractable model for indices approximating the growth optimal portfolio

Author

Listed:
  • 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)

  • Platen Eckhard

    (Finance Discipline Group and School of Mathematical Studies, University of Technology Sydney, Sydney, Australia)

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.

Suggested Citation

  • Baldeaux Jan & Ignatieva Katja & Platen Eckhard, 2014. "A tractable model for indices approximating the growth optimal portfolio," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 18(1), pages 1-21, February.
    • Handle: RePEc:bpj:sndecm:v:18:y:2014:i:1:p:1-21:n:3
    DOI: 10.1515/snde-2012-0054
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    1. Jan Baldeaux & Fung & Katja Ignatieva & Eckhard Platen, 2015. "A Hybrid Model for Pricing and Hedging of Long-dated Bonds," Applied Mathematical Finance, Taylor & Francis Journals, vol. 22(4), pages 366-398, September.
    2. Xavier Warin, 2016. "The Asset Liability Management problem of a nuclear operator : a numerical stochastic optimization approach," Papers 1611.04877, arXiv.org.
    3. Jan Baldeaux & Eckhard Platen, 2012. "Computing Functionals of Multidimensional Diffusions via Monte Carlo Methods," Papers 1204.1126, arXiv.org.
    4. Ralph Rudd & Thomas A. McWalter & Joerg Kienitz & Eckhard Platen, 2018. "Quantization Under the Real-world Measure: Fast and Accurate Valuation of Long-dated Contracts," Papers 1801.07044, arXiv.org, revised Jan 2018.
    5. Baldeaux, Jan & Ignatieva, Katja & Platen, Eckhard, 2018. "Detecting money market bubbles," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 369-379.
    6. Eckhard Platen & Renata Rendek, 2019. "Dynamics of a Well-Diversified Equity Index," Research Paper Series 398, Quantitative Finance Research Centre, University of Technology, Sydney.

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