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Estimating Stable Fixed Points and Langevin Potentials for Financial Dynamics

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Listed:
  • Tobias Wand
  • Timo Wiedemann
  • Jan Harren
  • Oliver Kamps

Abstract

The Geometric Brownian Motion (GBM) is a standard model in quantitative finance, but the potential function of its stochastic differential equation (SDE) cannot include stable nonzero prices. This article generalises the GBM to an SDE with polynomial drift of order q and shows via model selection that q=2 is most frequently the optimal model to describe the data. Moreover, Markov chain Monte Carlo ensembles of the accompanying potential functions show a clear and pronounced potential well, indicating the existence of a stable price.

Suggested Citation

  • Tobias Wand & Timo Wiedemann & Jan Harren & Oliver Kamps, 2023. "Estimating Stable Fixed Points and Langevin Potentials for Financial Dynamics," Papers 2309.12082, arXiv.org, revised Nov 2023.
    • Handle: RePEc:arx:papers:2309.12082
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    File URL: http://arxiv.org/pdf/2309.12082
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