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A mean-reverting SDE on correlation matrices

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Résumé

We introduce a mean-reverting SDE whose solution is naturally defined on the space of correlation matrices. This SDE can be seen as an extension of the well-known Wright-Fisher diffusion. We provide conditions that ensure weak and strong uniqueness of the SDE, and describe its ergodic limit. We also shed light on a useful connection with Wishart processes that makes understand how we get the full SDE. Then, we focus on the simulation of this diffusion and present discretization schemes that achieve a second-order weak convergence. Last, we give a possible application of these processes in finance and argue that they could easily replace and improve the standard assumption of a constant correlation.

langue originaleAnglais
Pages (de - à)1472-1520
Nombre de pages49
journalStochastic Processes and their Applications
Volume123
Numéro de publication4
Les DOIs
étatPublié - 21 janv. 2013

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