10.1 Model of the Behavior of Stock prices Chapter 10 Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University 10.1 Model of the Behavior of Stock Prices Chapter 10
10.2 Categorization of stochastic Processes >Discrete time: discrete variable >Discrete time continuous variable >Continuous time discrete variable >Continuous time: continuous variable Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University 10.2 Categorization of Stochastic Processes ➢Discrete time; discrete variable ➢Discrete time; continuous variable ➢Continuous time; discrete variable ➢Continuous time; continuous variable
10.3 Modeling stock prices >We can use any of the four types of stochastic processes to model stock prices The continuous time continuous variable process proves to be the most useful for the purposes of valuing derivative securities Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University 10.3 Modeling Stock Prices ➢We can use any of the four types of stochastic processes to model stock prices ➢The continuous time, continuous variable process proves to be the most useful for the purposes of valuing derivative securities
10.4 Markoⅴ Processes >In a markov process future movements in a variable depend only on where we are, not the history of how we got where we are >We will assume that stock prices follow Markov processes Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University 10.4 Markov Processes ➢In a Markov process future movements in a variable depend only on where we are, not the history of how we got where we are ➢We will assume that stock prices follow Markov processes
10.5 Weak-Form Market Efficiency The assertion is that it is impossible to produce consistently superior returns with a trading rule based on the past history of stock prices. In other words technical analysis does not work A Markov process for stock prices is clearly consistent with weak-form market efficlency Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University 10.5 Weak-Form Market Efficiency • The assertion is that it is impossible to produce consistently superior returns with a trading rule based on the past history of stock prices. In other words technical analysis does not work. • A Markov process for stock prices is clearly consistent with weak-form market efficiency