February 6th, 2016, 9:31 pm
QuoteOriginally posted by: GamalQuoteOriginally posted by: CuchulainnWhy do MFE students without maths background have to learn all those sigma algebras?To learn what they really are, forget and never bother again.Every finance papers starts with "Let (Ω,Σ,P) be a probability space" and that makes me crazy.First, this is clearly another case where we can blame the French! I don't know the local scene well enough to decide whether it's really people from Paris or Strasbourg, but probably both. Second, that being said, the concept of a filtration is actually rather useful when you want to be somewhat precise about concepts like conditional expectation, Markov process, martingale, stopping time, admissible trading strategy, to mention a few. Nothing is terribly complicated about this stuff in discrete time, finite state models, but all hell breaks loose when you go to continuous time and state models, and I agree that your typical MFE student is wholly unprepared to deal with that. In teaching such people I generally resort to being a bit formal about the concepts in simple models (typically the binomial) and arguing by analogy in the limiting continuous case.