Phases of MANES: Multi-Asset Non-Equilibrium Skew Model of a Strongly Non-Linear Market with Phase Transitions (2203.07550v1)

Abstract: This paper presents an analytically tractable and practically-oriented model of non-linear dynamics of a multi-asset market in the limit of a large number of assets. The asset price dynamics are driven by money flows into the market from external investors, and their price impact. This leads to a model of a market as an ensemble of interacting non-linear oscillators with the Langevin dynamics. In a homogeneous portfolio approximation, the mean field treatment of the resulting Langevin dynamics produces the McKean-Vlasov equation as a dynamic equation for market returns. Due to the strong non-linearity of the McKean-Vlasov equation, the resulting dynamics give rise to ergodicity breaking and first- or second-order phase transitions under variations of model parameters. Using a tractable potential of the Non-Equilibrium Skew (NES) model previously suggested by the author for a single-stock case, the new Multi-Asset NES (MANES) model enables an analytically tractable framework for a multi-asset market. The equilibrium expected market log-return is obtained as a self-consistent mean field of the McKean-Vlasov equation, and derived in closed form in terms of parameters that are inferred from market prices of S&P 500 index options. The model is able to accurately fit the market data for either a benign or distressed market environments, while using only a single volatility parameter.