International Journal of Statistics and Applied Mathematics
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2023, Vol. 8, Issue 4, Part A

Use of Orstein: Uhlenbeck model in deriving black: Scholes equation


Author(s): Magero Eric Nyaanga, Oduor D Brian and Muga M Zablon

Abstract:
One of the diffusion processes that is used to model the velocity of a particle that undergoes Brownian motion is the Orstein - Uhlenbeck, which can also be used to model the volatility of an underlying process. Black - Scholes model gives a very good approximation to the analysis of market derivatives despite its various assumptions. One benefit of the Orstein - Uhlenbeck model is that it leads to tractable solutions to a number of financial challenges. This study, therefore, formulates the Black - Scholes equation using Orstein - Uhlenbeck model, this will help solve some of the financial challenges faced in the Black - Scholes equation like constant volatility. This study uses the analysis of the Black - Scholes equation to derive a new model of the Black - Scholes equation using Orstein - Uhlenbeck model.


Pages: 18-20 | Views: 224 | Downloads: 21

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International Journal of Statistics and Applied Mathematics
How to cite this article:
Magero Eric Nyaanga, Oduor D Brian, Muga M Zablon. Use of Orstein: Uhlenbeck model in deriving black: Scholes equation. Int J Stat Appl Math 2023;8(4):18-20.

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International Journal of Statistics and Applied Mathematics