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Common trading task – Part 1

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Stochastic process

As Wikipedia suggests, a stochastic process is a random process, the counterpart to a deterministic process. For our simple tasks all we need is a time series, i.e. for each moment of time we have only one random value, or price: P(t). The process has a definite starting point P(0) but its further evolution has some degree of uncertainty described by probability distribution.

A lot of types of stochastic processes has been studied in mathematical literature. In this article I use only Itō processes as they provide quite good approximation of price dynamics.

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Written by fxpaul

January 3, 2011 at 12:00

Posted in trading math

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