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Stock Price model
Posted: August 11th, 2006, 2:20 pm
by arrun
Dear all,Can any one please explain me why any stock price is modeled like this?dS/S = m*dt + sigma*dw[t], where w[t] is weiner/brownian processThanks and regards,Arun
Stock Price model
Posted: August 11th, 2006, 2:29 pm
by chromo
because the model is1) a member of the class of affine process which have very useful properties. Including nice clean analytical solutions to some pricing problems.2) qualitatively similar to behaviour of actual price series3) better than any of the alternatives - the alternatives either don't resemble the actual price processes or don't give such pretty solutionsif this is too simple for you, try jump diffusions.
Stock Price model
Posted: August 12th, 2006, 9:02 pm
by rimaephosie
One thing, because the prices are not stationary, the returns are.