CKLS Mean Reverting Gamma Stochastic Differential Equation
Model 1
Let’s assume . This stochastic differential equation is called the CKLS Mean Reverting Gamma Stochastic Differential Equation.
Variables
- : Represents the Interest Rate or the Gene Frequency.
Parameters
- : The Mean Reversion, towards which tends to revert over the long term.
- : The Speed of Adjustment, where a higher value means a faster return to the mean.
- : Represents the Volatility.
- : Represents the nonlinear relationship between 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.
- : Becomes the Ornstein-Uhlenbeck Equation.
- : Becomes the CIR Model.
- : Becomes the Geometric Brownian Motion (GBM).
Panik. (2017). Stochastic Differential Equations: An Introduction with Applications in Population Dynamics Modeling: p184. ↩︎