Advertisement

An Introduction to Stochastic Analysis

  • Fred Espen Benth
Part of the Universitext book series (UTX)

Abstract

Before we can start to explain the option pricing theory of Black & Scholes it is necessary to build up a toolbox of stochastic analysis. This chapter introduces the Ito integral and the Ito formula, which constitute the foundation of stochastic analysis. The martingale property is discussed together with conditional expectation. We restrict our attention to those parts of stochastic analysis that are useful to option theory. Since we try to avoid too advanced mathematics, we shall resort to intuitive arguments rather than being mathematically stringent when presenting the theory. The more theoretically inclined reader is advised to look in [33,41] for a thorough introduction to stochastic analysis and its many applications.

Keywords

Stochastic Process Brownian Motion Stock Price Stochastic Differential Equation Option Price 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

Copyright information

© Springer-Verlag Berlin Heidelberg 2004

Authors and Affiliations

  • Fred Espen Benth
    • 1
  1. 1.Department of MathematicsCentre of Mathematics for Applications University of OsloOsloNorway

Personalised recommendations