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Stock price modeling
Dear all,Can any one please explain me why any stock price is modeled like this?dS/S = mu*dt + sigma*dw[t], where w[t] is weiner/brownian processThanks and regards,Arun
Stock price modeling
Because it is the simplest model one can think of that guarantees that S is positive.
Stock price modeling
It has many nice properties, and it seems to match the data relatively well (its tails are not quite fat enough though). Not only is it positive but the SDE you describe can be broken into two parts, the mean movement over time (mu*dt) and the fluctuation around this (sigma*dW(t)).