Assessing the inherent uncertainty of one-dimensional diffusions

Iddo Eliazar, Morrel H. Cohen

Research output: Contribution to journalArticle

5 Scopus citations

Abstract

In this paper we assess the inherent uncertainty of one-dimensional diffusion processes via a stochasticity classification which provides an à la Mandelbrot categorization into five states of uncertainty: infra-mild, mild, borderline, wild, and ultra-wild. Two settings are considered. (i) Stopped diffusions: the diffusion initiates from a high level and is stopped once it first reaches a low level; in this setting we analyze the inherent uncertainty of the diffusion's maximal exceedance above its initial high level. (ii) Stationary diffusions: the diffusion is in dynamical statistical equilibrium; in this setting we analyze the inherent uncertainty of the diffusion's equilibrium level. In both settings general closed-form analytic results are established, and their application is exemplified by stock prices in the stopped-diffusions setting, and by interest rates in the stationary-diffusions setting. These results provide a highly implementable decision-making tool for the classification of uncertainty in the context of one-dimensional diffusions.

Original languageEnglish (US)
Article number012126
JournalPhysical Review E - Statistical, Nonlinear, and Soft Matter Physics
Volume87
Issue number1
DOIs
StatePublished - Jan 22 2013

All Science Journal Classification (ASJC) codes

  • Statistical and Nonlinear Physics
  • Statistics and Probability
  • Condensed Matter Physics

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