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CONTINUOUS TIME PROCESSES IN TIMES OF CRISIS: THE CASE OF GBM AND CEV MODELS

Giversen, Jesper LU and Bendkia, Mohamed LU (2011) NEKM07 20091
Department of Economics
Abstract (Swedish)
This research aims at studying continuous time models within different stock market
environments. We assume that the modeling of continuous time processes may be altered
whether an equity market is experiencing a crisis or a pre-crisis period. As a benchmark
index, the S&P500 has been chosen for this study and the sampling periods in question
include the Black Monday of 1987, the Dot-Com of 2001, and the more recent 2007
Financial Crisis. Among the continuous time processes family, this study covers the
Geometric Brownian Motion (GBM) and the Constant Elasticity of Variance (CEV). After
estimating and analyzing their respective parameters using the Maximum Likelihood
Estimation method, both the Jarque-Bera normality test and the... (More)
This research aims at studying continuous time models within different stock market
environments. We assume that the modeling of continuous time processes may be altered
whether an equity market is experiencing a crisis or a pre-crisis period. As a benchmark
index, the S&P500 has been chosen for this study and the sampling periods in question
include the Black Monday of 1987, the Dot-Com of 2001, and the more recent 2007
Financial Crisis. Among the continuous time processes family, this study covers the
Geometric Brownian Motion (GBM) and the Constant Elasticity of Variance (CEV). After
estimating and analyzing their respective parameters using the Maximum Likelihood
Estimation method, both the Jarque-Bera normality test and the Likelihood Ratio are
performed on the two models. Unlike most research that support the use of CEV over GBM,
this research test outcomes show that there is no strong argument that could favor the
addition of a discount factor i.e. CEV over the Black-Scholes based process, the GBM model. (Less)
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author
Giversen, Jesper LU and Bendkia, Mohamed LU
supervisor
organization
course
NEKM07 20091
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Geometric Brownian Motion, GBM, Constant Elasticity of Variance, CEV, Continuous Time Processes, Financial Markets, Financial Crisis
language
English
id
1973618
date added to LUP
2011-06-01 13:58:57
date last changed
2011-06-01 13:58:57
@misc{1973618,
  abstract     = {This research aims at studying continuous time models within different stock market
environments. We assume that the modeling of continuous time processes may be altered
whether an equity market is experiencing a crisis or a pre-crisis period. As a benchmark
index, the S&P500 has been chosen for this study and the sampling periods in question
include the Black Monday of 1987, the Dot-Com of 2001, and the more recent 2007
Financial Crisis. Among the continuous time processes family, this study covers the
Geometric Brownian Motion (GBM) and the Constant Elasticity of Variance (CEV). After
estimating and analyzing their respective parameters using the Maximum Likelihood
Estimation method, both the Jarque-Bera normality test and the Likelihood Ratio are
performed on the two models. Unlike most research that support the use of CEV over GBM,
this research test outcomes show that there is no strong argument that could favor the
addition of a discount factor i.e. CEV over the Black-Scholes based process, the GBM model.},
  author       = {Giversen, Jesper and Bendkia, Mohamed},
  keyword      = {Geometric Brownian Motion,GBM,Constant Elasticity of
Variance,CEV,Continuous Time Processes,Financial Markets,Financial Crisis},
  language     = {eng},
  note         = {Student Paper},
  title        = {CONTINUOUS TIME PROCESSES IN TIMES OF CRISIS: THE CASE OF GBM AND CEV MODELS},
  year         = {2011},
}