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Brownian Motion
1.1 ORIGINS
1.2 BROWNIAN MOTION SPECIFICATION
1.3 USE OF BROWNIAN MOTION IN STOCK PRICE DYNAMICS
1.5 COVARIANCE OF BROWNIAN MOTION
1.6 CORRELATED BROWNIAN MOTIONS
1.7 SUCCESSIVE BROWNIAN MOTION INCREMENTS
1.7.1 Numerical Illustration
1.8 FEATURES OF A BROWNIAN MOTION PATH
1.8.1 Simulation of Brownian Motion Paths
1.8.2 Slope of Path
1.8.4 Measuring Variability
1.9 EXERCISES
1.10 SUMMARY
Martingales
2.1 SIMPLE EXAMPLE
2.2 FILTRATION
2.3 CONDITIONAL EXPECTATION
2.3.1 General Properties
2.4 MARTINGALE DESCRIPTION
2.4.1 Martingale Construction by Conditioning
2.5 MARTINGALE ANALYSIS STEPS
2.6 EXAMPLES OF MARTINGALE ANALYSIS
2.6.1 Sum of Independent Trials
2.6.2 Square of Sum of Independent Trials
2.6.3 Product of Independent Identical Trials
2.6.4 Random Process B(t)
2.6.5 Random Process exp[B(t)− 1
2.6.6 Frequently Used Expressions
2.7 PROCESS OF INDEPENDENT INCREMENTS
2.8 EXERCISES
2.9 SUMMARY
It¯o Stochastic Integral
3.1 HOW A STOCHASTIC INTEGRAL ARISES
3.2 STOCHASTIC INTEGRAL FOR NON-RANDOM STEP-FUNCTIONS
3.5 PROPERTIES OF AN IT ¯O STOCHASTIC INTEGRAL
3.6 SIGNIFICANCE OF INTEGRAND POSITION
3.7 IT ¯O INTEGRAL OF NON-RANDOM INTEGRAND
3.8 AREA UNDER A BROWNIAN MOTION PATH
3.9 EXERCISES
3.10 SUMMARY
3.11 A TRIBUTE TO KIYOSI IT¯O
ACKNOWLEDGMENT
It¯o Calculus
4.1 STOCHASTIC DIFFERENTIAL NOTATION
4.2 TAYLOR EXPANSION IN ORDINARY CALCULUS
4.3 IT ¯O’S FORMULA AS A SET OF RULES
4.4 ILLUSTRATIONS OF IT ¯O’S FORMULA
4.4.2 Function of Brownian Motion f[B(t)]
4.4.5 Change of Numeraire
4.4.6 Deriving an Expectation via an ODE
4.5 L´EVY CHARACTERIZATION OF BROWNIAN MOTION
4.6 COMBINATIONS OF BROWNIAN MOTIONS
4.7 MULTIPLE CORRELATED BROWNIAN MOTIONS
4.8 AREA UNDER A BROWNIAN MOTION PATH–REVISITED
4.10 EXERCISES
4.11 SUMMARY
Stochastic Differential Equations
5.1 STRUCTURE OF A STOCHASTIC DIFFERENTIAL EQUATION
5.2 ARITHMETIC BROWNIAN MOTION SDE
5.10 GENERAL SOLUTION METHODS FOR LINEAR SDEs
5.11 MARTINGALE REPRESENTATION
5.12 EXERCISES
5.13 SUMMARY
Option Valuation
6.1 PARTIAL DIFFERENTIAL EQUATION METHOD
6.3 MARTINGALE METHOD IN CONTINUOUS-TIME FRAMEWORK
6.4 OVERVIEW OF RISK-NEUTRAL METHOD
6.5.1 Digital Call
6.5.2 Asset-or-Nothing Call
6.7 EXERCISE
6.8 SUMMARY
Change of Probability
7.1 CHANGE OF DISCRETE PROBABILITY MASS
7.2 CHANGE OF NORMAL DENSITY
7.3 CHANGE OF BROWNIAN MOTION
7.4 GIRSANOV TRANSFORMATION
7.5 USE IN STOCK PRICE DYNAMICS – REVISITED
7.6 GENERAL DRIFT CHANGE
7.7 USE IN IMPORTANCE SAMPLING
7.8 USE IN DERIVING CONDITIONAL EXPECTATIONS
7.9 CONCEPT OF CHANGE OF PROBABILITY
7.10 EXERCISES
7.11 SUMMARY
Numeraire
8.1 CHANGE OF NUMERAIRE
8.1.1 In Discrete Time
8.1.2 In Continuous Time
8.2 FORWARD PRICE DYNAMICS
8.2.1 Dynamics of Forward Price of a Bond
8.3 OPTION VALUATION UNDER MOST SUITABLE NUMERAIRE
8.3.1 Exchange Option
8.3.2 Option on Bond
8.3.3 European Call under Stochastic Interest Rate
8.7 APPLICATION IN CREDIT RISK MODELLING
8.8 EXERCISES
8.9 SUMMARY
A.2 PROBABILITY OF BROWNIAN MOTION POSITION
A.3 BROWNIAN MOTION REFLECTED AT THE ORIGIN
A.4 FIRST PASSAGE OF A BARRIER
A.5 ALTERNATIVE BROWNIAN MOTION SPECIFICATION
B.1 RIEMANN INTEGRAL
B.2 RIEMANN–STIELTJES INTEGRAL
B.3 OTHER USEFUL PROPERTIES
B.4 REFERENCES
C.2 FIRST VARIATION
D.1 DISTANCE BETWEEN POINTS
D.2 NORM OF A FUNCTION
D.3 NORM OF A RANDOM VARIABLE
D.4 NORM OF A RANDOM PROCESS
D.5 REFERENCE
E.1 CENTRALLIMITTHEOREM
E.2 MEAN-SQUARECONVERGENCE
E.3 ALMOSTSURECONVERGENCE
E.4 CONVERGENCEINPROBABILITY
E.5 SUMMARY
References
Index
P. 1
Brownian Motion Calculus

# Brownian Motion Calculus

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Brownian Motion Calculus presents the basics of Stochastic Calculus with a focus on the valuation of financial derivatives. It is intended as an accessible introduction to the technical literature. A clear distinction has been made between the mathematics that is convenient for a first introduction, and the more rigorous underpinnings which are best studied from the selected technical references. The inclusion of fully worked out exercises makes the book attractive for self study. Standard probability theory and ordinary calculus are the prerequisites.  Summary slides for revision and teaching can be found on the book website.
Brownian Motion Calculus presents the basics of Stochastic Calculus with a focus on the valuation of financial derivatives. It is intended as an accessible introduction to the technical literature. A clear distinction has been made between the mathematics that is convenient for a first introduction, and the more rigorous underpinnings which are best studied from the selected technical references. The inclusion of fully worked out exercises makes the book attractive for self study. Standard probability theory and ordinary calculus are the prerequisites.  Summary slides for revision and teaching can be found on the book website.

Publish date: Apr 15, 2008
Added to Scribd: Nov 27, 2012

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09/16/2014

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9780470021712

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