Questions tagged [geometric-brownian]

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Change of numéraire for two risky assets without bank account (Margrabe’s formula?)

I am considering two risky assets following the usual correlated GBM given by $$\frac{\mathrm{d}S^{(i)}_t}{S^{(i)}_t}=\mu_i\mathrm{d}t+\sigma_i\mathrm{d}W^{(i)}_t,\quad i\in\{1,2\}$$ with $$\mathrm{d}...
3
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0answers
71 views

GBM probability of hitting non constant barrier

I know there is a formula for probability of hitting a constant barrier for GBM/BM (See page 651 in Martinagle Methods in Financial Modelling). Is there a formula for non-constant barrier? The ...
2
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0answers
43 views

Stochastic process for historical time series with high volatility

I have the following historical time series which is a metric of BTC. According to my Prof., it can be modelled using a Geometric Brownian Motion, however due to the extremely high volatility and ...
2
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1answer
54 views

Simulating correlated Geometric Brownian Motion with lag

I know that it is possible to simulate two correlated GBM in e.g. Matlab (Generating Correlated Asset Paths in MATLAB) based on cholesky decomposition. However, they take as input the correlation ...
2
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0answers
99 views

Simulating correlated Geometric Brownian Motion in Python

I want to simulate two correlated Geometric Brownian Motion processes in Python. I found an implementation from Matlab (https://www.goddardconsulting.ca/matlab-monte-carlo-assetpaths-corr.html) and ...
2
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0answers
51 views

Why does higher volatility for ATM Call Option lead to a lower risk-neutral probability of expiring ITM?

This is a follow-up question on the discussion in the thread here, from which I borrow the graph below depicting $N(d_2)$ (i.e. the risk neutral probability of a Call option expiring in the money) ...
2
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0answers
66 views

Theoretical Expected Maximum Drawdown vs Empirical Maximum Drawdown

I have been looking at the approach for calculating the expected maximum drawdown of a Brownian Motion [1] and the corresponding function maxddStats in the fBasics package in R [2]. I do not ...
1
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0answers
35 views

Calibrate Geometric Brownian Motion of trading volume time series

Let's say I'm modeling the trading volume of a stock price (e.g. Apple Inc.) to follow a Geometric Brownian Motion and I want to estimate the parameters (i.e. drift and volatility) using historical ...
1
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0answers
38 views

Moments of a SDE: a detail on the information set

Very basic questions. Let $(z_t)_{t \geq 0}$ be a standard Brownian motion and let $$dS_t = \mu S_t dt + \sigma S_t dz_t.$$ When we write $E\left( S_t \right)$, do we mean $E\left( S_t \big| F_0 \...
1
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0answers
43 views

Source on multivariate correlated geometric Brownian motion returns, not prices

Can anyone provide a source that formulates how to generate multivariate geometric Brownian motion returns using the Cholesky method with target correlation matrix, instead of correlated GBM prices? ...
1
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0answers
70 views

On Geometric Brownian motion and Itô's formula

Let $S_t$ be a geometric brownian motion such as $$d S(t) = rS(t)dt +\sigma S(t)dW(t),$$ where $W$ is a standard Brownian motion. With Itô's lemma and formulas $(dt)^2=dtdW_t=dW_tdt=0$ and $(dW_t)^2=...
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0answers
21 views

VAR Monte Carlo GBM vs Selecting Normal Dist Returns

I am running a VaR calculation and have seen two ways of doing it in several places online. One simply assumes normal distribution of returns and selects n number of returns from the normal ...
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0answers
46 views

Probability of Hitting time of Brownian motion

Let $B =\{ B(t); t \ge 0\}$ be Brownian motion. What is the probability that $B$ hits state one and then state minus one before time one? My take: Let $T_x = \inf \{ t\ge 0 : B(t) = x\}$, the first ...
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0answers
42 views

Simulating correlated stock paths to calculate VaR

So I wanted to generate a Monte Carlo simulation for two correlated assets to derive then the VaR as a quantile of the generated distributions. My code is the following, where the input parameters are ...
0
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0answers
61 views

Arbitrage free pricing of option to trade stocks

Consider Black-Scholes model with constant interest rate r and stocks with prices $S_t^A$ and $S_t^B$ that satisfy the SDE's $dS_t^A = S_t^A(\mu^A dt + \sigma^A dB_t)$ and $dS_t^B = S_t^B(\mu^B dt + \...
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0answers
63 views

Geometric brownian motion and probabilities

A stock's price movement is described by the equations $dS_t=0.02S_tdt+0.25S_tdW_t$ and $S_0=100$. An investor buys a call option on said stock with a strike price $K=95$ which expires in $T=2$ years. ...
0
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60 views

Convert drift and diffusion term in terms of time in the Geometric Brownian Motion framework

Assume that we have daily prices covering the period of 10 years. For calibrating the drift and diffusion parameters of the GBM model $$S_{t+1} = S_{t}e^{[(\mu-\sigma^2/2)]\Delta t + \sigma \sqrt{\...