Speaker: Dr. Runhuan Feng from the University of Illinois at Urbana-Champaign
Date and Time: Friday, April 9, 2021, 12pm – 1pm via Zoom. Please contact Qingning Zhou to obtain the Zoom link.
Title: Modeling Financial Market Movement with Winning Streaks: Sticky Maximum Process
Abstract: Winning streaks appear frequently in all financial markets including equity, commodity, foreign exchange, real estate, etc. Most stochastic process models for financial market data in the current literature focus on stylized facts such as fat-tailedness relative to normality, volatility clustering, mean reversion. However, none of existing financial models captures the pervasive feature of persistent extremes: financial indices frequently report record highs or lows in concentrated periods of time. In this paper, we apply the technique of time change with local time to capture the market anomaly of persistent extremes. The new model which is driven by a sticky processes with moving boundaries { running maxima enables us to measure and assess the impact of persistent extremes on financial derivatives. Despite the time change construction, option prices are still solvable analytically. In addition, the model in this paper reveals a paradox that investors who bet on the growth of financial market may be worse off with pervasive winning streaks in the market.