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A tractable model for indices approximating the growth optimal portfolio

  • 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)

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.

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Article provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.

Volume (Year): 18 (2014)
Issue (Month): 1 (February)
Pages: 1-21

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Handle: RePEc:bpj:sndecm:v:18:y:2014:i:1:p:1-21:n:3
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  1. Peter Carr & Vadim Linetsky, 2006. "A jump to default extended CEV model: an application of Bessel processes," Finance and Stochastics, Springer, vol. 10(3), pages 303-330, September.
  2. Alan L. Lewis, 2000. "Option Valuation under Stochastic Volatility," Option Valuation under Stochastic Volatility, Finance Press, number ovsv, January.
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  19. Henry Allen Latane, 1959. "Criteria for Choice Among Risky Ventures," Journal of Political Economy, University of Chicago Press, vol. 67, pages 144.
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