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Post by Sapphire Capital on Jul 11, 2008 5:57:46 GMT 4
Stochastic Processes in Finance and Behavioral Finance MATJAZ STEINBACHER Free Society Institute -------------------------------------------------------------------------------- July, 01 2008 FSI Working Paper No. 4 Abstract: The article suggested studying asset pricing and finance as a stochastic process, where preferences and psychology of agents play the most significant role in people's decision-making. Namely, human reasoning is a very complex system that is hard to be explained only through the set of differential equations. As has been demonstrated with experimentation, people usually also do not behave consistent in time and use different ways of strategic thinking, which further complicates the understanding of price movements. Although many attempts to define asset pricing through a kind of a stochastic process have been tried, i. e. Brownian motion or martingale, daily volatilities that were not foreseen indicate that new paradigm is needed. papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1153969_code892135.pdf?abstractid=1153969&mirid=3
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