THE DYNAMICS OF ASSET PRICES AND THE ROLE OF INFORMATION: ANALYSIS AND APPLICATIONS IN ASSET AND RISK MANAGEMENT

Mondher Bellalah
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Mondher Bellalah: Université de Cergy-Pontoise, France

Chapter 11 in Derivatives, Risk Management & Value, 2009, pp 493-533 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThe following sections are included:Chapter OutlineIntroductionContinuous Time Processes for Asset Price DynamicsAsset price dynamics and Wiener processAsset price dynamics and the generalized Wiener processAsset price dynamics and the Ito processThe log-normal propeDistribution of the rate of returnIto's Lemma and Its ApplicationsIntuitive formApplications to stock pricesMathematical formThe generalized Ito's formulaOther applications of Ito's formulaTaylor Series, Ito's Theorem and the Replication ArgumentThe relationship between Taylor series and Ito's differentialIto's differential and the replication portfolioIto's differential and the arbitrage portfolioWhy are error terms neglected?Forward and Backward EquationsThe Main Concepts in Bond Markets and the General Arbitrage PrincipleThe main concepts in bond pricingTime-dependent interest rates and information uncertaintyThe general arbitrage principleDiscrete Hedging and Option PricingDiscrete hedgingPricing the optionThe real distribution of returns and the hedging errorSummaryQuestionsAppendix A: Introduction to Diffusion ProcessesAppendix B: The Conditional ExpectationAppendix C: Taylor SeriesExercisesReferences

Keywords: Options; Forwards; Futures; Valuation; Hedging; Arbitrage; Speculation; Pricing (search for similar items in EconPapers)
Date: 2009
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