Abstract
We study models of regulatory breakup, in the spirit of Strong and Fouque [Ann. Finance 7 (2011) 349–374] but with a fluctuating number of companies. An important class of market models is based on systems of competing Brownian particles: each company has a capitalization whose logarithm behaves as a Brownian motion with drift and diffusion coefficients depending on its current rank. We study such models with a fluctuating number of companies: If at some moment the share of the total market capitalization of a company reaches a fixed level, then the company is split into two parts of random size. Companies are also allowed to merge, when an exponential clock rings. We find conditions under which this system is nonexplosive (i.e., the number of companies remains finite at all times) and diverse, yet does not admit arbitrage opportunities.
Citation
Ioannis Karatzas. Andrey Sarantsev. "Diverse market models of competing Brownian particles with splits and mergers." Ann. Appl. Probab. 26 (3) 1329 - 1361, June 2016. https://doi.org/10.1214/15-AAP1118
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