Chapter 14

Modeling Stock Prices


This chapter provides a short introduction to stocks and an empirical description of how we might model their fluctuations. Many securities have a value that depends on the stock price and, as we shall see later, the price of these derivatives can be obtained by constructing hedging strategies which involve buying and selling the stock over time. To understand the average behavior of these strategies it is crucial to have some kind of model for how stock prices fluctuate in time.

14.2 What Are Stocks?

We all know that a stock represents fractional ownership, with limited liability, in a company. The value of a stock can be estimated by traditional balance sheet analysis, but also fluctuates ...

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