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Role of Noise in a Market Model with Stochastic Volatility

G. Bonanno·D. Valenti·B. Spagnolo
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Abstract

We study a generalization of the Heston model, which consists of two coupled stochastic differential equations, one for the stock price and the other one for the volatility. We consider a cubic nonlinearity in the first equation and a correlation between the two Wiener processes, which model the two white noise sources. This model can be useful to describe the market dynamics characterized by different regimes corresponding to normal and extreme days. We analyze the effect of the noise on the statistical properties of the escape time with reference to the noise enhanced stability (NES) phenomenon, that is the noise induced enhancement of the lifetime of a metastable state. We observe NES effect in our model with stochastic volatility. We investigate the role of the correlation between the two noise sources on the NES effect.

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G. Bonanno, D. Valenti, B. Spagnolo. 2006-10-09. Role of Noise in a Market Model with Stochastic Volatility. https://doi.org/10.1140/epjb%2Fe2006-00388-1

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