A second-order stock market model |
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| Authors: | Robert Fernholz Tomoyuki Ichiba Ioannis Karatzas |
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| Affiliation: | 1. INTECH, One Palmer Square, Princeton, NJ, 08542, USA
2. Department of Statistics and Applied Probability, South Hall, University of California, Santa Barbara, CA, 93106, USA
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| Abstract: | A first-order model for a stock market assigns to each stock a return parameter and a variance parameter that depend only on the rank of the stock. A second-order model assigns these parameters based on both the rank and the name of the stock. First- and second-order models exhibit stability properties that make them appropriate as a backdrop for the analysis of the idiosyncratic behavior of individual stocks. Methods for the estimation of the parameters of second-order models are developed in this paper. |
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