Stochastic Processes in Finance

Abstract

Stochastic processes arising in the description of the risk-neutral evolution of equity prices are reviewed. Starting with Brownian motion, I review extensions to Lévy and Sato processes. These processes have independent increments; the former are homogeneous in time, whereas the latter are inhomogeneous. One-dimensional Markov processes such as local volatility and local Lévy are discussed next. Finally, I take up two forms of stochastic volatility that are due to either space scaling or time changing. An encompassing discrete-time model closes the presentation.