In physics, Brownian motion or pedesis characterizes randomity in the movement of particles within fluid. The application of this physics concept to financial markets was first proposed by Samuel A. Samuelson and later by Robert C. Merton in works such as Proof that Properly Anticipated Prices Fluctuate Randomly (1965) and Black-Scholes Merton (1973) which notably incorporates Brownian Motion or a log-normal distribution to account for random changes in the pricing of the underlying asset. Brownian motion financial models derive much of their inspiration and assumptions from the one-period market models propounded by Harry Markowitz and William F. Sharpe in Modern Portfolio Theory. Brownian Motion models of financial markets seek to conceptualize asset classes, markets, portfolio dynamics, returns, and wealth in terms of continuous-time stochastic processes. The model makes three distinct assumptions, firstly that these assets confer continuous prices changing continuously in time dictated by Brownian motion processes, secondly that no transactional costs apply, and thirdly that the assets lack gaps, jumps, or inordinate fluctuations in price across time intervals, typically between trading periods.
Application and Explanation by Bionic Turtle:
https://www.youtube.com/watch?v=e79OtCamxD0
Link to Spreadsheet using Example Logs-returns: https://drive.google.com/file/d/1uIi17d6e6_K3pU9gNJ0qpnKIqh0-D4os/view
No comments:
Post a Comment