Analysis of market weights under volatility-stabilized market models

Abstract

We derive the joint density of market weights, at fixed times and suitable stopping times, of the volatility-stabilized market models introduced by Fernholz and Karatzas in [Ann. Finan. 1 (2005) 149–177]. The argument rests on computing the exit density of a collection of independent Bessel-square processes of possibly different dimensions from the unit simplex. We show that the law of the market weights is the same as that of the multi-allele Wright–Fisher diffusion model, well known in population genetics. Thus, as a side result, we furnish a novel proof of the transition density function of the Wright–Fisher model which was originally derived by Griffiths by bi-orthogonal series expansion.