Understanding stock market returns hinges on understanding their volatility. Two simple but competing models have been dominant for decades: the Heston model, introduced in 1993, and the multiplicative model, which dates back to 1990. American physicists recently compared the two models by applying them to the United States stock market and using historical data from two indexes: the S&P500 and Dow Jones Industrial Average. In a study published in The European Physical Journal B, Rostislav Serota and colleagues from the University of Cincinnati, OH, USA, demonstrate the clear differences between the two models. Simply put, the Heston model is better for predicting long-time accumulations of stock returns, while the multiplicative model is better suited to predicting daily or several-day returns.
* This article was originally published here
