MAS6052 Stochastic Processes and Finance
|Both semesters, 2017/18||20 Credits|
|Lecturer:||Dr Nic Freeman||Home page||Timetable||Reading List|
|Aims||Outcomes||Teaching Methods||Assessment||Full Syllabus|
A stochastic process is a mathematical model for a randomly evolving system. In this course we study several examples of stochastic process and analyse their behavior. We apply our knowledge of stochastic processes to mathematical finance, in particular to asset pricing and the Black-Scholes model.
There are no prerequisites for this module.
No other modules have this module as a prerequisite.
- Stochastic Processes: We introduce conditional expectation and martingales, which are used to study the behavior of stochastic processes such as random walks, urn models, branching processes, Brownian motion and diffusions. Stochastic integration with respect to Brownian motion is introduced.
- Stochastic Finance: We study the key concept of arbitrage and arbitrage free pricing, both in finite markets and in the continuous time Black-Scholes model. We also introduce the idea of modelling debt contagion using branching processes.
- Introduce probability spaces, σ-fields and conditional expectation.
- Introduce martingales and study their basic properties.
- Analyse the behaviour of different types of stochastic process, such as random walks, urn models and branching processes.
- Explain the role of arbitrage and arbitrage free pricing.
- Use finite market models to price and hedge a range of financial derivatives.
- Introduce Brownian motion and study its basic properties.
- Introduce stochastic calculus, Ito's formula and stochastic differential equations.
- Derive the Black-Schole's formula in continuous time and use it to price a range of financial derivatives.
- Study extensions of the Black-Scholes model.
- Use branching processes to model debt contagion.
- Study various examples of stochastic processes.
- Use martingales and related tools to study the behavior of stochastic processes.
- Price and hedge financial derivatives, using both finite market models and the continuous time Black-Scholes formula.
Lectures, with a complete set of printed notes, plus exercises. Some parts of the lecture notes are for independent study.
44 lectures, no tutorials
One three hour closed book exam.
- Probability and measure
- Conditional expectation
- Martingales and related theory
- Examples of stochastic processes
- Brownian motion and stochastic calculus
- Arbitrage pricing
- Finite markets models, options and hedging
- Black-Scholes Theory in continuous time
- Extensions of the Black-Scholes model
- Contagion through branching processes
|B||Williams, D.||Probability with Martingales||519.236 (W)||Blackwells||Amazon|
|C||Bjork, T||Arbitrage Theory in Continuous Time||Blackwells||Amazon|
|C||Etheridge, A.||A Course in Financial Calculus||332.0151922 (E)||Blackwells||Amazon|
|C||Wilmott, P., Howison, S., Dewynne, J.||The Mathematics of Financial Derivatives||Blackwells||Amazon|
(A = essential, B = recommended, C = background.)
Most books on reading lists should also be available from the Blackwells shop at Jessop West.
Timetable (semester 1)
|Mon||13:00 - 13:50||lecture||Hicks Lecture Theatre A|
|Fri||11:00 - 11:50||lecture||Hicks Lecture Theatre A|