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Title |
Distributional Approximation of Asset Returns with Nonparametric Markovian Trees |
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Author |
Gaetano Iaquinta, Sergio Ortobelli Lozza |
| Citation |
Vol. 6 No. 11 pp. 69-74 |
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Abstract |
The paper proposes the use a Markov chain to model and predict the distributional behaviour of a portfolio of returns. In particular, it describes an algorithm to compute the distribution of returns that follow a markovian tree. This approach reduces the computational complexity as compared to the classic markovian approach, since the tree recombines at each temporal step. Furthermore, the paper compares ex-post the assumption that returns follow either a geometric Brownian motion or a Markov chain. Finally, it discusses some possible financial applications of the proposed approach. |
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Keywords |
Computational complexity, Markov chain, return distribution, financial applications. |
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