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Advanced Fixed Income Analysis, 2nd Edition by Michele Lizzio, Moorad Choudhry

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Chapter 2

The Dynamics of Asset Prices

Abstract

This chapter describes an introduction to stochastic processes, reviewing the basic principles of the dynamics of asset prices, which are fundamental to understand the interest-rate models. The concept of a stochastic process is a vital concept in finance theory. It describes random phenomena that evolve over time, and these include asset prices.

Keywords

Asset prices

Stochastic process

Wiener process

Martingale property

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