Calibrated rank volatility stabilized models for large equity markets LSE Research Online Home home About fingerprint
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stabilized models for large equity markets Itkin, D. & Larsson, M. (2026). Calibrated rank volatility stabilized
models for large equity markets. Finance and Stochastics, [In Press] Copy Share Abstract In the framework of stochastic
portfolio theory we introduce rank volatility stabilized models for large equity markets over long time horizons. These
models are rank-based extensions of the volatility stabilized models introduced in Fernholz and Karatzas [14]. On the
theoretical side we establish global existence of the model and ergodicity of the induced ranked market weights. We also
derive explicit expressions for growth-optimal portfolios and show the existence of relative arbitrage with respect to
the market portfolio. On the empirical side we calibrate the model to twenty-six years of CRSP US equity data matching
(i) rank-based volatilities, (ii) stock turnover as measured by market weight collisions, (iii) the average market rate
of return and (iv) the capital distribution curve. Assessment of model fit and error analysis is conducted both in- and
out-of-sample. To the best of our knowledge this is the first model exhibiting relative arbitrage that has been
statistically shown to have a good quantitative fit with the empirical features (i)-(iv). We additionally perform a
historical backtest experiment, with and without proportional transaction costs, for a certain long-only portfolio
inspired by our calibrated model. Item Type Article Copyright holders © 2026 The Author(s) Departments LSE >
Academic Departments > Statistics Date Deposited 22 July 2026 Acceptance Date 13 June 2026 URI
https://researchonline.lse.ac.uk/id/eprint/140340 Explore Further Itkin, David HA Statistics National Science Foundation
Close mail Request Copy subject Accepted Version lock_clock Restricted to Repository staff only until 1 January 2100
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