dorsal/arxiv
View SchemaUnderlying Dynamics of Typical Fluctuations of an Emerging Market Price Index: The Heston Model from Minutes to Months
| Authors | Renato Vicente, Charles M. de Toledo, Vitor B. P. Leite, Nestor Caticha |
|---|---|
| Categories | |
| ArXiv ID | physics/0506101 |
| URL | https://arxiv.org/abs/physics/0506101 |
| DOI | 10.1016/j.physa.2005.06.095 |
| Journal | Physica A 361 272-288 (2006) |
Abstract
We investigate the Heston model with stochastic volatility and exponential tails as a model for the typical price fluctuations of the Brazilian S\~ao Paulo Stock Exchange Index (IBOVESPA). Raw prices are first corrected for inflation and a period spanning 15 years characterized by memoryless returns is chosen for the analysis. Model parameters are estimated by observing volatility scaling and correlation properties. We show that the Heston model with at least two time scales for the volatility mean reverting dynamics satisfactorily describes price fluctuations ranging from time scales larger than 20 minutes to 160 days. At time scales shorter than 20 minutes we observe autocorrelated returns and power law tails incompatible with the Heston model. Despite major regulatory changes, hyperinflation and currency crises experienced by the Brazilian market in the period studied, the general success of the description provided may be regarded as an evidence for a general underlying dynamics of price fluctuations at intermediate mesoeconomic time scales well approximated by the Heston model. We also notice that the connection between the Heston model and Ehrenfest urn models could be exploited for bringing new insights into the microeconomic market mechanics.
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"abstract": "We investigate the Heston model with stochastic volatility and exponential\ntails as a model for the typical price fluctuations of the Brazilian S\\~ao\nPaulo Stock Exchange Index (IBOVESPA). Raw prices are first corrected for\ninflation and a period spanning 15 years characterized by memoryless returns is\nchosen for the analysis. Model parameters are estimated by observing volatility\nscaling and correlation properties. We show that the Heston model with at least\ntwo time scales for the volatility mean reverting dynamics satisfactorily\ndescribes price fluctuations ranging from time scales larger than 20 minutes to\n160 days. At time scales shorter than 20 minutes we observe autocorrelated\nreturns and power law tails incompatible with the Heston model. Despite major\nregulatory changes, hyperinflation and currency crises experienced by the\nBrazilian market in the period studied, the general success of the description\nprovided may be regarded as an evidence for a general underlying dynamics of\nprice fluctuations at intermediate mesoeconomic time scales well approximated\nby the Heston model. We also notice that the connection between the Heston\nmodel and Ehrenfest urn models could be exploited for bringing new insights\ninto the microeconomic market mechanics.",
"arxiv_id": "physics/0506101",
"authors": [
"Renato Vicente",
"Charles M. de Toledo",
"Vitor B. P. Leite",
"Nestor Caticha"
],
"categories": [
"physics.soc-ph",
"q-fin.ST"
],
"doi": "10.1016/j.physa.2005.06.095",
"journal_ref": "Physica A 361 272-288 (2006)",
"title": "Underlying Dynamics of Typical Fluctuations of an Emerging Market Price Index: The Heston Model from Minutes to Months",
"url": "https://arxiv.org/abs/physics/0506101"
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