Eckhard Platen's A Benchmark Approach to Quantitative Finance (Finance) PDF

By Eckhard Platen

ISBN-10: 0195300572

ISBN-13: 9780195300574

The benchmark method offers a common framework for monetary marketplace modeling, which extends past the normal risk-neutral pricing conception. It allows a unified remedy of portfolio optimization, by-product pricing, built-in possibility administration and assurance hazard modeling. The lifestyles of an identical risk-neutral pricing degree isn't required. as an alternative, it ends up in pricing formulae with admire to the real-world likelihood degree. This yields vital modeling freedom which seems to be worthwhile for the derivation of real looking, parsimonious industry versions. the 1st a part of the ebook describes the required instruments from chance thought, records, stochastic calculus and the idea of stochastic differential equations with jumps. the second one half is dedicated to monetary modeling by the benchmark process. quite a few quantitative equipment for the real-world pricing and hedging of derivatives are defined. the overall framework is used to supply an knowing of the character of stochastic volatility. The e-book is meant for a large viewers that incorporates quantitative analysts, postgraduate scholars and practitioners in finance, economics and assurance. It goals to be a self-contained, obtainable yet mathematically rigorous advent to quantitative finance for readers that experience an affordable mathematical or quantitative heritage. eventually, the ebook may still stimulate curiosity within the benchmark method by means of describing a few of its strength and huge applicability.

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The benchmark method presents a normal framework for monetary industry modeling, which extends past the normal risk-neutral pricing conception. It allows a unified remedy of portfolio optimization, by-product pricing, built-in possibility administration and assurance threat modeling. The life of an identical risk-neutral pricing degree isn't really required.

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3) When a continuous random variable has a probability density fX , then the corresponding expression for its mean is ∞ µX = E(X) = −∞ x fX (x) dx. 4) One may say that the product fX (x) dx approximates the probability that X takes its value in the interval (x, x + dx). 1). 4) can both be equivalently expressed as an integral with respect to the measure P . That is, we can write X(ω) dP (ω). 4) actually exist, that is, they are finite and well defined for each subset of Ω. 12 at the end of this chapter.

First and Second Moments of Random Vectors Let X = (X1 , X2 , . . , Xn ) denote a random vector. Then the expectation is taken componentwise and we obtain E(X) = (E(X1 ), E(X2 ), . . , E(Xn )) . 27) i,j In the case when B = [B i,j ]n,m is i,j=1 is an n × m random matrix, where B some random variable we obtain its expectation as the n × m matrix E(B) = [E(B i,j )]n,m i,j=1 . 28) Let X = (X1 , X2 , . . , Xn ) and Y = (Y1 , Y2 , . . , Ym ) with n, m ∈ N denote two random vectors. 29) i,j=1 The matrix Cov(X) = Cov(X, X) is called the autocovariance matrix of the vector X.

31) for x ∈ . The variance gamma density is a three parameter density. The parameter λ is the shape parameter with smaller λ implying larger tail heaviness. Furthermore, when λ → ∞ the variance gamma density asymptotically approaches the Gaussian density. 10 plots the logarithm of the variance gamma density. The densities of the Student t, normal inverse Gaussian, hyperbolic and variance gamma distribution look very similar when plotted directly. However, their tail densities highlight significant differences.

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A Benchmark Approach to Quantitative Finance (Finance) by Eckhard Platen


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