I have taken probability theory course in college and want to see how it is used practically in finance.
What papers should I read? I want it to be not too difficult (undergraduate probability theory course level would be great)
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$\begingroup$ What about this one: dx.doi.org/10.2307%2F3215299 $\endgroup$– KiwiakosCommented Jun 7, 2016 at 22:19
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$\begingroup$ In my experience, probability theory like risk neutral measure is only used in academic. $\endgroup$– SmallChessCommented Jun 8, 2016 at 6:39
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$\begingroup$ Can you please list some of the topics you've covered: e.g. Probability measures, Lebesgue integration, Ito's lemma, Girsanov's theorem, HJB equation, etc. Probability theory is still a broad topic (not even including statistics!), and can be applied in areas including Monte Carlo applications in financial engineering, interest rate modelling in fixed income, stochastic control in optimisation and HFT, etc. $\endgroup$– oliversmCommented Jun 8, 2016 at 16:47
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$\,\,\,$Generally, Finance involve some degree of uncertainty, so we need to use probabilistic reasoning in order to make a sound decision. Nowadays, we need to apply modern probability in each part of finance and this issue is too widespread.However, I introduce some useful articles and books:
- Levy processes: From probability to finance and quantum groups
- The Laplace Distribution and Generalizations: A Revisit with Applications to Communications, Economics, Engineering, and Finance
- Recovering Probability Distributions from Option Prices
- The application of continuous-time random walks in finance and economics
Large Deviations of Heavy-Tailed Random Sums with Applications in Insurance and Finance