Stochastic processes. From physics to finance (Q4948550)

This book provides an introduction into the theory of stochastic processes with applications from physics and finance. It is useful to graduate students with a background in physics or chemistry who are interested in applying methods and techniques taken from physics to model and understand the dynamics of financial markets. Chapter 1 gives a short overview of the history of probability theory and stochastic processes and discusses the properties of the random walk in one dimension. Chapter 2 provides the mathematical background (central limit theorem, martingales, Markov processes, Fokker-Planck equations, Itô stochastic calculus) needed later on in the book. The necessary mathematical theorems are presented but not proved. In Chapter 3 several classical applications of the theory of stochastic processes like random walks on a \(d\)-dimensional lattice, ``Kramer's problem'' or the mean field approximation of the Ising model, are presented. The last section presents Nelson's derivation of quantum mechanics. Chapter 4 introduces into the theory of stable distributions and Lévy processes. In Section 4.4 the authors discuss the truncated Lévy distribution which has been proposed by \textit{R. N. Mantegna} and \textit{H. E. Stanley} [in: Lévy flights and related topics in physics. Lect. Notes Phys. 450, 300-312 (1995; Zbl 0831.60105)] as description of financial price fluctuations. Chapter 5 deals with the modeling of financial markets. In Section 5.2, the classical Black-Scholes option pricing formula is derived. Section 5.3 reviews empirical laws of asset price variations. Section 5.4 discusses the concept of self-organized criticality and the model of Johansen and Sornette (1998, 1999) which is particularly suitable for describing stock market crashes. At the end of each chapter, the authors have added references to the pertinent literature.