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Rezo Frolov
Rezo Frolov

Solutions To Stochastic Calculus For Finance II...



"... a book that is a marvelous first step for the person wanting a rigorous development of stochastic calculus, as well as its application to derivative pricing. By focusing solely on Brownian motion, the reader is able to develop an intuition and a feel for how to go about solving problems as well as deriving results." --- Mark A. Cassano (see the full review from the Journal of Finance)




Solutions to Stochastic Calculus for Finance II...



"...the results are presented carefully and thoroughly, and I expect that readers will find that this combination of a careful development of stochastic calculus with many details and examples is very useful and will enable them to apply the whole theory confidently." --- Martin Schweizer (Berlin) from the review in Zentralblatt fur Mathematik: (0962.60001) "I thoroughly enjoyed reading this book. The author is to be complimented for his efforts in providing many useful insights behind the various theories. It is a superb introduction to stochastic calculus and Brownian motion." --- Elias Shiu (from the review in JASA)


The book is primarily about the core theory of stochastic calculus, but it focuses on those parts of the theory that have really proved that they can "pay the rent" in practical applications. The intention is also to coach people toward honest mastery. This means that one must be selective in the topics that are treated, and one must engage those topics to some depth.


Eventually I plan to provide links here to the index and to provide complete solutions for some NEW problems. Over time I would like to make this more like a community page and less like a publisher's flyer. I've made a little progress in that direction with the Cauchy-Schwarz home page, but it takes time. In the meanwhile, I am thinking about a problem book on Brownian motion. This book would also have problems that are directed toward stochastic calculus.


It goes without saying that Rubenstein's book is unique. A grandmaster of the field looks at its most important papers and puts into clear prose what he sees as their main contributions. You could have sold me this book one page at a time for several bucks per page. There is not a ton of stochastic calculus in these books, but there certainly are some interesting connections that help explain how stochastic calculus found its place in the world.


We have opted to present a range of modules that will be most useful in quantitative finance albeit with an emphasis on stochastic calculus and stochastic processes. By choosing such modules we are necessarily leaving out many useful and interesting areas of mathematics.


Stochastic Analysis (or Stochastic Calculus) is the theory that underpins modern mathematical finance. It provides a natural framework for carrying out derivatives pricing. While quantitative finance is one of the main application areas of stochastic analysis, it also has a rich research history in the fields of pure mathematics, theoretical physics and engineering.


There are a wealth of textbooks on the stochastic calculus necessary for derivatives pricing. The most widely recommended introductory text with a reasonable level of mathematical rigour is by Shreve:


Within finance stochastic optimal control is used for optimal asset allocation decisions, as well as for pricing of American option contracts. It is also closely related to the machine learning field of Reinforcement Learning, itself famous for its recent successes in beating humans at both the ancient game of Go and real-time strategy video games.


Markov Processes are a well-studied tool in mathematical finance, since they form the basis of the Markov Chain Monte Carlo (MCMC) algorithm, which underpins computational Bayesian statistics. Another application for Markov Chains is in estimating parameters in stochastic volatility models. We have previously discussed Hidden Markov Models as a further application.


In probability theory and related fields, a stochastic (/stoʊˈkæstɪk/) or random process is a mathematical object usually defined as a family of random variables. Stochastic processes are widely used as mathematical models of systems and phenomena that appear to vary in a random manner. Examples include the growth of a bacterial population, an electrical current fluctuating due to thermal noise, or the movement of a gas molecule.[1][4][5] Stochastic processes have applications in many disciplines such as biology,[6] chemistry,[7] ecology,[8] neuroscience,[9] physics,[10] image processing, signal processing,[11] control theory,[12] information theory,[13] computer science,[14] cryptography[15] and telecommunications.[16] Furthermore, seemingly random changes in financial markets have motivated the extensive use of stochastic processes in finance.[17][18][19]


Random walks are stochastic processes that are usually defined as sums of iid random variables or random vectors in Euclidean space, so they are processes that change in discrete time.[85][86][87][88][89] But some also use the term to refer to processes that change in continuous time,[90] particularly the Wiener process used in finance, which has led to some confusion, resulting in its criticism.[91] There are other various types of random walks, defined so their state spaces can be other mathematical objects, such as lattices and groups, and in general they are highly studied and have many applications in different disciplines.[90][92]


Martingales have many applications in statistics, but it has been remarked that its use and application are not as widespread as it could be in the field of statistics, particularly statistical inference.[222] They have found applications in areas in probability theory such as queueing theory and Palm calculus[223] and other fields such as economics[224] and finance.[18]


After World War II the study of probability theory and stochastic processes gained more attention from mathematicians, with significant contributions made in many areas of probability and mathematics as well as the creation of new areas.[253][266] Starting in the 1940s, Kiyosi Itô published papers developing the field of stochastic calculus, which involves stochastic integrals and stochastic differential equations based on the Wiener or Brownian motion process.[267]


TY - JOURAU - Ondreját, MartinAU - Seidler, JanTI - A note on weak solutions to stochastic differential equationsJO - KybernetikaPY - 2018PB - Institute of Information Theory and Automation AS CRVL - 54IS - 5SP - 888EP - 907AB - We revisit the proof of existence of weak solutions of stochastic differential equations with continuous coeficients. In standard proofs, the coefficients are approximated by more regular ones and it is necessary to prove that: i) the laws of solutions of approximating equations form a tight set of measures on the paths space, ii) its cluster points are laws of solutions of the limit equation. We aim at showing that both steps may be done in a particularly simple and elementary manner.LA - engKW - stochastic differential equations; continuous coefficients; weak solutionsUR - ER -


  • Quantitative Methods: this thread draws on the curriculum of Stevens' Mathematics department and includes a minimum of one year of calculus, and one year of probability and statistics. Electives in this thread extend to more advanced calculus (multivariable, stochastic) and other quantitative techniques used in advanced financial applications.

  • Computer Science: this thread draws on the curriculum offered by the Stevens Computer Science department (in the School of Science and Engineering). It begins at the introductory level, and includes seven core courses, building to a reasonable proficiency in C++, basic financial modeling tools and techniques, and an intermediate level of proficiency in web- based programming; beyond the required core. There are elective courses in fields such as data mining, machine learning and computerized trading platform architectures for students interested in developing advanced computer science capabilities.

  • Finance & economics: (including Financial Engineering): this thread draws on both the Business & Technology Program (Steven's successful undergraduate business degree) and the graduate program in Financial Engineering (in the School of Systems & Enterprises). It encompasses the standard business and finance foundation disciplines such as accounting, economics, corporate and international finance and capital markets - as well as QF - specific topics such as financial engineering, risk management, and market regulation & securities law. Electives drawn principally from the Financial Engineering department cover advanced topics such as derivatives pricing, hedging strategies, fixed income securities and computational finance.



358 Mathematical Model Building (1 course) An introductory study of the formulation of mathematical models to represent, predict, and control real-world situations, especially in the social and biological sciences. The course will use ideas from calculus, linear algebra, and probability theory to describe processes that change in time in some regular manner, which may be deterministic or stochastic. Typical topics are Markov and Poisson processes, discrete and continuous equations of growth, and computer simulation. In addition, students will work on their own mathematical modeling projects. Prerequisites: MCS-177, MCS-122, MCS-221, and MCS-142 or MCS-341. Juniors and Seniors only. January Interim, even years. 041b061a72


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