Financial Derivatives/Notions of Stochastic Calculus

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Stochastic Process[edit]

A stochastic process is an indexed collection of random variables:

Where our sample space, and is the index of the process which may be either discrete or continuous. Typically, in finance, is an interval and we deal with a continuous process. In this text we interpret as the time.

If we fix a the stochastic process becomes the random variable:

On the other hand, if we fix the outcome of our random experiment to we obtain a deterministic function of time: a realization or sample path of the process.

Brownian Motion[edit]

A stochastic process with is called a Wiener Procees (or Brownian Motion) if:

-

- It has independent, stationary increments. Let , then: are independent. And

- is almost surely continuous

References[edit]

Wikipedia on Stochastic Process Wikipedia on Wiener Process