2
$\begingroup$

Talking with some traders the other day, I found out that they were using a pricing model based on a mix between a geometric brownian motion and an arithmetic brownian motion to price certain derivatives.

Would anyone know if this is actually a well known model? Or is this actually one of these "secret" solutions that certain quant teams develop?

Practitioners' take on the matter would be particularly helpful.

$\endgroup$
0
$\begingroup$

Are you talking about something like this?

$$dx(t)=\ldots\ dt+[x(t)]^\gamma\ dW(t)$$

If $\gamma$ is zero then you've got BM, if it's one you get GBM, inbetween you have a 'mix'.

$\endgroup$
  • $\begingroup$ thanks, I suppose I would be looking at something like: $dx(t) = r [x(t)]^{\gamma} + \sigma [x(t)]^{\gamma}dW(t)$. Does this model have a well-used name? $\endgroup$ – Iliana Jul 24 '16 at 10:43
  • 1
    $\begingroup$ I would put it under (Generalized) Constant Elasticity of Variance models. $\endgroup$ – Kiwiakos Jul 24 '16 at 14:14

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.