Calculus: The Mathematics of Financial Markets: A Comprehensive survey of Financial Calculus by Van Der Post Hayden

Author:Van Der Post, Hayden
Language: eng
Format: epub
Publisher: Reactive Publishing
Published: 2023-12-03T00:00:00+00:00

Chapter 8: Stochastic Calculus in Finance

Overview of Stochastic Processes

Stochastic processes are essential mathematical concepts used to model systems that evolve over time in a way that is inherently random or unpredictable. In finance, these processes are crucial for modeling various phenomena such as asset price movements, interest rates, and market risks.

Characteristics of Stochastic Processes: These processes are characterized by randomness and are used to describe phenomena where outcomes cannot be precisely predicted but follow a certain probabilistic distribution.

Application in Financial Markets: In financial modeling, stochastic processes are employed to simulate the random behavior of asset prices, interest rates, and other financial variables. This approach allows for a more realistic representation of market behavior compared to deterministic models.

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