Stochastic Calculus and Applications to finance - WMM9AM92

Goal(s)

This MSc course aims at presenting the fundamental concepts of Stochastic Calculus, and the way this concepts have been used in order to build models for applications to finance. Stochastic calculus is a theory that uses Brownian motion and Itô’s integral as basic building blocks, and Itô's formula as a multipurpose tool, in order to describe and manipulate a rather large variety of continuous time Stochastic processes , called « continuous semimartingales » (Stochastic calculus for processes with jumps is out of the scope of this course). The theory of Stochastic calculus is largely due to the seminal work by K. Itô, that goes back to the 1940s and 1950s. This work has been rediscovered by economists (among them Myron Scholes) in the 1970s, giving rise to the famous Black-Scholes model. Since the late 1980s the link between Stochastic calculus and economics has been more and more formalized, giving rise to the fleld of « Mathematical Finance ».

Responsible(s)

Pierre ETORE

Content(s)

The content is planned to be:

• Continuous time stochastic processes, Brownian motion (definition and properties)
• Continuous time martingales
• Itô’s integral
• Itô’s formula, Theorem of Lévy, Theorem of Girsanov
• Black-Scholes model; notion of pricing and hedging
• Princing and hedging formulas, illustration of the link between Stochastic Differential Equations and Partial Differential Equations inside Black-Scholes type models.

This course requires knowledge of probability and integration theory. Some previous knowledge of Stochastic processes is welcomed. No previous knowledge of Brownian motion or Stochastic Calculus is required.

Test

Evaluation : Examen écrit (3h)

Resit : Examen écrit (2h)

Evaluation consists in a final written exam.

The exam is given in english only

Calendar

The course exists in the following branches:

• Curriculum - Master in Applied Mathematics - Semester 9 (this course is given in english only)

Additional Information

Course ID : WMM9AM92
Course language(s):

You can find this course among all other courses.

Bibliography

text course of the course: https://membres-ljk.imag.fr/Pierre.Etore/fichiers/poly_SCAF.pdf

"Continuous martingales and brownian motion", D. Revuz, M. Yor
"Brownian motion and stochastic calculus" I.K. Karatzas S.E. Shreve
"Stochastic Calculus for Finance", S.E. Shreve