Mauboussin & Schay (2000)1 discovered an almost linear relationship between the logarithm of the market capitalisation and the logarithm of the rank for growth stocks. Kou & Kou (2001)2 proposed an explanation for this observation based on the theory of birthdeath processes (which are a special kind of Markov chains). In this article, we provide a complementary explanation of a log-log linear relation observed by Mauboussin & Schay by assuming that the stock evolution is governed by a Feller mean-reverting square-root process.
Source: Risk magazine | 01 Jul 2002
Categories: Equity Derivatives