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CKLS Mean Reverting Gamma Stochastic Differential Equation 📂Stochastic Differential Equations

CKLS Mean Reverting Gamma Stochastic Differential Equation

Model 1

dXt=(αβXt)dt+σXtγdWt,X0>0 d X_{t} = \left( \alpha - \beta X_{t} \right) dt + \sigma X_{t}^{\gamma} d W_{t} \qquad , X_{0} > 0 Let’s assume α,β,σ,γ>0\alpha, \beta, \sigma, \gamma > 0. This stochastic differential equation is called the CKLS Mean Reverting Gamma Stochastic Differential Equation.

Variables

  • XtX_{t}: Represents the Interest Rate or the Gene Frequency.

Parameters

  • α/β\alpha / \beta: The Mean Reversion, towards which XtX_{t} tends to revert over the long term.
  • α>0\alpha > 0: The Speed of Adjustment, where a higher value means a faster return to the mean.
  • σ>0\sigma > 0: Represents the Volatility.
  • γ>0\gamma > 0: Represents the nonlinear relationship between XtX_{t} and volatility.

Explanation

The CKLS equation proposed by Chan, Károlyi, Longstaff, Sanders is a stochastic differential equation that can be seen as a generalization of several well-known models in financial mathematics.


  1. Panik. (2017). Stochastic Differential Equations: An Introduction with Applications in Population Dynamics Modeling: p184. ↩︎