Tags » Clarified

beta definition in CAPM - confusion cleared

In CAPM, beta (of a stock like ibm) is defined in terms of
* cov(ibm excess return, mkt excess return), and
* variance of ibm excess return… 365 more words


physical measure is impractical

RN measure is the “first” practical measure for derivative pricing. Most theories/models are formulated in RN measure. T-Forward measure and stock numeraire are convenient when using these models… 149 more words


drift ^ growth rate - imprecise

The drift rate “j” is defined for BM not GBM

                dAt = j dt + dW term

Now, for GBM,

                dXt = r Xt  dt + dW term… 31 more words


so-called tradable asset - disillusioned

The touted feature of a “tradable” doesn’t impress me. Now I feel this feature is useful IMHO only for option pricing theory. All traded assets are supposed to follow a GBM (under RN measure) with the same growth rate as the MMA, but I’m unsure about most of the “traded assets” such as — 124 more words


mean reversion in Hull-White model

The (well-known) mean reversion is in drift, i.e. the inst drift, under physical measure.

(I think historical data shows mean reversion of IR, which is somehow related to the “mean reversion of drift”….) 87 more words


vol (unlike stdev) always implies a process

label – math intuitive

Volatility, in the context of pure math (not necessarily finance), refers to the coefficient of dW term. Therefore,

* it implies a measure, 118 more words


Black-scholes vol - different from the "standard" vol

label: stoch, not finVol


The “vol” in Black-Scholes is the sigma: (Notice S and the GBM)

<!–>dS=…S dt+S σ dW<!–>


In other contexts, “vol” is defined as the y in… 42 more words