Stochastic differential equations in finance (Q5925253)

The paper attempts a survey of three major areas of modern finance literature where stochastic process models have been used. The first is the Black-Scholes model of stock option prices and its extensions. The second is the class of arbitrage bond models which explains the yield curve for bonds of different maturity. Finally, a model of interest rate fluctuations in a general equilibrium framework is presented under stochastic production and technological evolution conditions. A brief review of numerical methods for solving the stochastic differential equations arising in the models above is also presented.