Brownian Motion for Financial Mathematics | Brownian Motion for Quants

Brownian Motion for Financial Mathematics | Brownian Motion for Quants | Stochastic Calculus

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Күн бұрын

In this tutorial we will investigate the stochastic process that is the building block of financial mathematics. We will consider a symmetric random walk, scaled random walk and Brownian motion. The mathematic notation and explanations are from Steven Shreve's book Stochastic Calculus for Finance II.
Important properties of Brownian motion are that it is a martingale (Markov process) and that it accumulates quadratic variation at rate one per unit time.
Note: Quadratic Variation is perhaps what makes Stochastic Calculus so different from Ordinary Calculus.
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00:00 Intro
02:24 Symmetric Random Walk
06:55 Quadratic Variation
09:08 Scaled Symmetric Random Walk
10:20 Limit of Binomial Distribution
12:10 Brownian Motion
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Пікірлер: 34

@lucascooky8242 2 жыл бұрын

You made me understand more material in 15 minutes than I did during my 4 hours lecture. Please keep it up you are an awesome teacher!

@infianant 2 жыл бұрын

You have explained it brilliantly…. Looking forward for other videos as well …keep uploading

@mustafizurrahman5699 24 күн бұрын

One of the best video on Brownian motion. Such a lucid explanation

@yassinejermouni3224 2 жыл бұрын

the best channel ever thxx man

@user-wr4yl7tx3w Жыл бұрын

Excellent video

@War4Skills 2 жыл бұрын

Hooooly shit, you are so good at explaining these topics, which apparently don't have to be so difficult compared to how my professor explains it.

@skeetski2307 Жыл бұрын

College prolly masters level made simple, and available for us to try to learn. appreciate you

@mundrakeshav22 2 жыл бұрын

I am currently pursuing the FRM (cleared FRM Level 1) and also learning Python! Which books would you suggest me to refer for building stronger basics??

@tonyjones4451 5 ай бұрын

this guy saved my degree... was averaging a 2:2 and now im getting first! (: so happy!!

@tonyjones4451 5 ай бұрын

i got help.. #adhd #specialroom #extratime

@simonabarone8920 Жыл бұрын

Can you simulate multidimensional Brownian motion with the correllation matrix?

@ibtissamaymen7321 Жыл бұрын

Thank you for your vedios, i have question please, why you use .T and what is T??

@mobileentertainment212 Жыл бұрын

Are there any pre-req video i can watch? really could not catch any of it. For example, what filtration means

@sergeychigrinov1360 2 жыл бұрын

Hi @Jonathon! Why we use square root of time when we switch to the scaled random walk? From what I see increments are additive, so to get to the same position at time 1 we need to do NxSize steps and not sqrt(N)xSize steps. I gues this is to keep properties of the process the same, but this is not too intuitive. If the answer is long - please steer me into the right direction. Thanks!

@QuantPy 2 жыл бұрын

Hi Sergey, the reason we take the square root of n, is because Brownian Motion accumulates variation at rate one per unit time. Hence the process scales with the square root of time/(size steps). The proof is long, my favourite source is Steven Shreve, Stochastic Calculus for Finance II, page 101-107 (2008 edition).

@pona5s Жыл бұрын

Wanted to see the reason behind 1/sqrt(n), too, my thoughts were: If the [variance Var(x)] increases at one per time, the [average observed squared outcome E(x^2)] does as well, since Var=E((x-µ)^2) and µ=0. So for one step per t, the unscaled RW_0 has E_0(x^2)=t , then we want to speed up and do n steps per t. Sped up Var_1(x) and E_1(x^2) will be n-fold the original then. To bring it back to the original(0) distribution, divide by n and rearrange so that we know how we must scale x: E_1(x^2)/n = E_0(x^2) Then we can get the factor in the expected value expression and thus scale the x^2 by 1/n E_1(1/n * x^2) = E_0(x^2), or, equivavently, x by sqrt(1/n): E_1((x/sqrt(n))^2) = E_0(x^2) We can see that replacing x by x/sqrt(n) yields the original property. But might be invalid for some reason.

@ghostwhowalks5623 3 ай бұрын

fantastic video!! Quick question - what does it mean to say "variance accumulates at rate one per unit time"? Thanks!

@parsecsprinter904 6 ай бұрын

How can you use the normal distribution in your example for Brownian Motion with n = 100 steps and time t = 10 when "n" is not at all high enough to assume a normal distribution? It should have been a Binomial distribution instead. No? The binomial won't converge to normal at just small n. Law of Large Numbers.

@patite3103 2 жыл бұрын

Thank you for the video! What is a filtration?

@QuantPy 2 жыл бұрын

Filtrations are ordered information, stored as sigma-algebra. en.m.wikipedia.org/wiki/Filtration_(probability_theory)

@skalderman 6 ай бұрын

How is it random if its dependent on anything?

@iv2689 2 жыл бұрын

Any book recommendations for a beginners in financial mathematics (Cfa candidate)?

@Jiftyj Жыл бұрын

you can see the book in the background. its steven shreve, stochastic calculus for finance ii

@meisterthea 2 жыл бұрын

At 8:40 into the video you mention 10,000,000 simulations but it is not clear how you did this. Please explain.

@QuantPy 2 жыл бұрын

No worries, just change the number of simulations M=10,000,000

@emmanuelameyaw9735 2 жыл бұрын

Hi Jonathan...how is brownian motio used in industry? Or this is it? Nice tutorial though...

@drdca8263 Жыл бұрын

It is a foundation used in many models, such as, iirc, the Black-Scholes model . Double checked, and yes, Black-Scholes assumed that stock prices follow geometric Brownian motion. What is shown here, Brownian motion, is not geometric Brownian motion, but you should understand Brownian motion before understanding geometric Brownian motion (and going from Brownian to Geometric Brownian is a very small step.) Of course, I imagine quants and such use proprietary more complicated things on top, but they are presumably still using something closely related to geometric Brownian motion, and so knowing Brownian motion is required. Of course, Brownian motion shows up in non-financial contexts as well. For example, the motion of small particles sitting in some water, is the origin of the idea. Brownian motion / the Wiener process (nearly synonymous) is used in electrical engineering when modeling (an integral of) white noise, and in control theory . It is also the basis of a formulation of the of the path integral formulation of quantum mechanics? Though that last example isn’t so much “in industry” I guess.