Asset modeling, stochastic volatility and stochastic correlation
نویسندگان
چکیده
Asset prices are typically modeled with the geometric Brownian motion (GBM). Correlation between the assets is exogenously modeled and then ad-hoc assigned to the asset prices. This is conceptually and mathematically unsatisfying. We create a new, simple approach, which simultaneously models stochastic volatility and stochastic correlation. This approach replicates the realworld volatility – correlation relationship well. We apply the model to extend the geometric Brownian motion. This extension has a CAPM interpretation and improves the modeling of asset prices significantly.
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