Business Intelligence

Conditional Density Models For Asset Pricing

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Executive Summary

The authors model the dynamics of asset prices and associated derivatives by consideration of the dynamics of the conditional probability density process for the value of an asset at some specified time in the future. In the case where the asset is driven by Brownian motion, an associated "Master equation" for the dynamics of the conditional probability density is derived and expressed in integral form. By a "Model" for the conditional density process they mean a solution to the master equation along with the specification of the initial density, and the volatility structure of the density.

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