International Journal of Statistics and Applied Mathematics
2021, Vol. 6, Issue 1, Part A
Statistical mechanics in economics: An application of Brownian motion in modeling prices of assetsAuthor(s):
Etebong P Clement and Uko S JimAbstract:
The Black Option Pricing Model in recent times has been under strong criticism. The Black Models assume that the probability of extreme price changes is negligible, when in reality stock prices in the stock market are subject to fluctuations. Again, the modern formulation of statistical models is based on the description of the physical system by an ensemble that represents all possible configurations of the system and the probability of realizing each configuration. Therefore, the probability of extreme price changes should not be neglected. Consequently, this work set out to develop a model (the Modified Geometric Brownian Motion Model (MGBMM)) for perpetual warrant option for prices of assets (shares of stock) traded in a perfect market with an arbitrary stock price in the warrant. Reasons that support the Modified Geometric Brownian Motion Model as an appropriate model in a perfect market are presented with a completely specified strategy for managing option investment which permits practical testing of the model’s efficacy. Thus, illustrating how the notion of Statistical Mechanics is applied in economics to model the prices of assets in the financial market.Pages: 29-34 | Views: 344 | Downloads: 15Download Full Article: Click Here
How to cite this article:
Etebong P Clement, Uko S Jim. Statistical mechanics in economics: An application of Brownian motion in modeling prices of assets. Int J Stat Appl Math 2021;6(1):29-34.