On the Validity of the Geometric Brownian Motion Assumption

Date
2005-01-01
Authors
Marathe, Rahul
Ryan, Sarah
Ryan, Sarah
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Ryan, Sarah
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Abstract

The geometric Brownian motion (GBM) process is frequently invoked as a model for such diverse quantities as stock prices, natural resource prices and the growth in demand for products or services. We discuss a process for checking whether a given time series follows the GBM process. Methods to remove seasonal variation from such a time series are also analyzed. Of four industries studied, the historical time series for usage of established services meet the criteria for a GBM; however, the data for growth of emergent services do not.

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<p>The Version of Record of this manuscript has been published and is available in Engineering Economist 2005, <a href="http://dx.doi.org/10.1080/00137910590949904" target="_blank">http://www.tandfonline.com/10.1080/00137910590949904</a>. Posted with permission.</p>
Keywords
engineering economics, geometric Brownian motion (GBM), lognormal growth, stock procies, chemical industry, electric utilities, industrial economics, industrial engineering, Brownian movement
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