Probability distribution of returns in Heston model for index prices of FTSE Bursa Malaysia KLCI

Abstract

Financial investment is one of the most lucrative opportunities to earn money if the investors can make smart decision in investing their resources. However, investments involve certain risks, it may generate positive or negative returns, which means it may increase or decrease the investors’ capital. In this study, the probability distribution of returns for the index prices of FTSE Bursa Malaysia KLCI based on the Heston Model with stochastic variance is constructed to analyse its capability in describing the returns for the index prices of FTSE Bursa Malaysia KLCI. The values of parameters in Heston Model of the index prices of FTSE Bursa Malaysia KLCI have been estimated based on Simulated Maximum Likelihood method using SDE toolbox in Matlab. The solutions of the stochastic differential equation were approximated by Euler-Maruyama method. It is found that for complete set of FTSE Bursa Malaysia KLCI data, the probability distribution of log returns for closing prices of FTSE Bursa Malaysia KLCI fitted the theoretical curve (Dragulescu and Yakovenko, 2002) better at time lag, . However, for truncated data of FTSE Bursa Malaysia KLCI, the probability distribution of log returns for closing prices of FTSE Bursa Malaysia KLCI fitted the theoretical curve (Dragulescu and Yakovenko, 2002) better at time lag, 1, 5 and 20.