Stochastic exponential growth and lattice gases. Statistical mechanics of stochastic growth processes (Q2160157)

In this book the author discusses a numerical phenomenon which appears in several problems of financial mathematics, when computing expectations of products of factors depending on a common stochastic process. Firstly author presents a detailed introduction to stochastic growth processes with growth rates driven by the exponential of a Gaussian stochastic process. They are particular cases of random multiplicative processes with Markovian dependence. After introducing these models, it is illustrated the numerical phenomena in the simplest setting of the bank account in the Black-Derman-Toy model (Chapters 1 and 2). It is shown that the mathematics of these processes is closely related to a statistical mechanics model: one-dimensional lattice gases of particles interacting by attractive two-body potentials (Chapter 3). Chapter 4 gives a pedagogical introduction to the physics of lattice gas systems. In Chapter 5 presented an exact solution of the gas with exponential attractive interaction in the thermodynamic limit \(n\rightarrow \infty\) taken such that the potential range is in a fixed ratio to the lattice size. Chapter 6 contains explicit results for the growth rates (Lyapunov exponents )of the moments of the stochastic growth process with geometric Brownian motion growth rates. The last Chapter 7 gives a few applications of the theoretical results to simulation of Euler-discretized stochastic volatility models with log-normal volatility rates, and to interest rates modeling