Scaling symmetry, renormalization, and time series modeling: the case of financial assets dynamics.
We present and discuss a stochastic model of financial assets dynamics based on the idea of an inverse renormalization group strategy. With this strategy we construct the multivariate distributions of elementary returns based on the scaling with time of the probability density of their aggregates. In its simplest version the model is the product of an endogenous autoregressive component and a random rescaling factor designed to embody also exogenous influences. Mathematical properties like increments' stationarity and ergodicity can be proven. Thanks to the relatively low number of parameters, model calibration can be conveniently based on a method of moments, as exemplified in the case of historical data of the S&P500 index. The calibrated model accounts very well for many stylized facts, like volatility clustering, power-law decay of the volatility autocorrelation function, and multiscaling with time of the aggregated return distribution. In agreement with empirical evidence in finance, the dynamics is not invariant under time reversal, and, with suitable generalizations, skewness of the return distribution and leverage effects can be included. The analytical tractability of the model opens interesting perspectives for applications, for instance, in terms of obtaining closed formulas for derivative pricing. Further important features are the possibility of making contact, in certain limits, with autoregressive models widely used in finance and the possibility of partially resolving the long- and short-memory components of the volatility, with consistent results when applied to historical series.
HuGeF, Via Nizza 52, 10126 Torino, Italy.
Marco
M
Zamparo
Dipartimento di Fisica e Astronomia, Sezione INFN, Università di Padova, Via Marzolo 8, I-35131 Padova, Italy.
Fulvio
F
Baldovin
Dipartimento di Fisica e Astronomia, Sezione INFN, Università di Padova, Via Marzolo 8, I-35131 Padova, Italy.
Michele
M
Caraglio
Dipartimento di Fisica e Astronomia, Sezione INFN, Università di Padova, Via Marzolo 8, I-35131 Padova, Italy.
Attilio L
AL
Stella