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SPDE limit of the global fluctuations in rank-based models

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  • Praveen Kolli
  • Mykhaylo Shkolnikov

Abstract

We consider systems of diffusion processes ("particles") interacting through their ranks (also referred to as "rank-based models" in the mathematical finance literature). We show that, as the number of particles becomes large, the process of fluctuations of the empirical cumulative distribution functions converges to the solution of a linear parabolic SPDE with additive noise. The coefficients in the limiting SPDE are determined by the hydrodynamic limit of the particle system which, in turn, can be described by the porous medium PDE. The result opens the door to a thorough investigation of large equity markets and investment therein. In the course of the proof we also derive quantitative propagation of chaos estimates for the particle system.

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  • Praveen Kolli & Mykhaylo Shkolnikov, 2016. "SPDE limit of the global fluctuations in rank-based models," Papers 1608.00814, arXiv.org.
    • Handle: RePEc:arx:papers:1608.00814
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    References listed on IDEAS

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    1. Shkolnikov, Mykhaylo, 2012. "Large systems of diffusions interacting through their ranks," Stochastic Processes and their Applications, Elsevier, vol. 122(4), pages 1730-1747.
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    Cited by:

    1. Sergio A. Almada Monter & Mykhaylo Shkolnikov & Jiacheng Zhang, 2018. "Dynamics of observables in rank-based models and performance of functionally generated portfolios," Papers 1802.03593, arXiv.org.

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