Bounded brownian motion

Diffusions are widely used in finance due to their tractability. Driftless diffusions are needed to describe ratios of asset prices under a martingale measure. We provide a simple example of a tractable driftless diffusion which also has a bounded state space.

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Bibliographic Details
Published in:Risks (Basel) 2017-12, Vol.5 (4), p.1-24
Main Author: Carr, Peter
Format: Article
Language:English
Subjects:
Arbitrage
Brownian martingale
Brownian motion
diffusion coefficient
Markov analysis
Risk
standard Brownian motion
Stock prices
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Description
Summary:Diffusions are widely used in finance due to their tractability. Driftless diffusions are needed to describe ratios of asset prices under a martingale measure. We provide a simple example of a tractable driftless diffusion which also has a bounded state space.
ISSN:2227-9091
2227-9091
DOI:10.3390/risks5040061