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Patrick Roger
Strasbourg University, EM Strasbourg Business School
May 2010
2
Probability for Finance
2010 Patrick Roger & Ventus Publishing ApS
ISBN 978-87-7681-589-9
3
Probability for Finance Contents
Contents
Introduction 8
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Probability for Finance Contents
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Probability for Finance Contents
6
Probability for Finance Contents
Bibliography 114
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Probability for Finance Introduction
8
Probability for Finance Introduction
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9
Probability for Finance Probability spaces and random variables
t = 0 T = 1.
.
T
P
P
10
Probability for Finance Probability spaces and random variables
P()
A P()
B A, B c A B c B B c =
{ / / B} . A
(Bn , n N) A, +
n=1 Bn A.
A
(, A) A
T = 1
A A A
/ A.
, .
= {1 , 2 , 3 , 4 } ,
A = {, } A =
{, { 1 , 2 } , { 3 , 4 } , } A = P(),
(Bn , n N) A, +
n=1 Bn
A A
A.
11
Probability for Finance Probability spaces and random variables
= {B1 , ..., BK }
Bi Bj = i = j
K
i=1 Bi = .
A
A.
A
,
, .
Bj
Bj )
Bj Bj
12
Probability for Finance Probability spaces and random variables
= {B1 , ..., BK }
, B ,
.
B , ,
.
B 2K
A
T > 1
T
P) t < T,
P).
A P) A A
A A
A .
, A ) A
= { 1 , 2 , 3 , 4 } ,
A = {, { 1 , 2 } , { 3 , 4 } , } P).
A B A B c A { 1 , 2 } =
{ 3 , 4 }c . A A
{ 1 , 2 } { 3 , 4 } = .
A
A A A
Card( Card(
Card( < Card(P(.
P(
13
Probability for Finance Probability spaces and random variables
.
.
A A A
A .
2K
K K
A A;
u
d),
uu = u2
u
ud
1
du
d
dd = d2
{uu; ud}
.
{uu; ud} .
ud du
ud
.
14
Probability for Finance Probability spaces and random variables
du.
R,
BR .
R R. BR
15
Probability for Finance Probability spaces and random variables
(, A)
A A [0; 1]
P () = 1
(Bn , n N) A
+ +
P Bn = P (Bn )
n=1 n=1
(, A, P )
B B c ,
P (B) + P (B c ) = P () = 1
P (B c ) = 1P (B).
B B c
16
Probability for Finance Probability spaces and random variables
(, A, P )
P () = 0
(Bn , n N) Bn Bn+1
A
lim P (Bn ) = P Bn
n+
nN
(Bn , n N) Bn Bn+1
A
lim P (Bn ) = P Bn
n+
nN
B A, P (B c ) = 1 P (B)
P ( ) = P () + P () =
P () = 1. P () = 0
B1 B2 P (B2 ) = P (B1 (B2 B1c )) = P (B1 ) + P (B2 B1c )
P (B1 )
n
(Bn , n N) un = P p=1 Bp
P () = 1
(Bn , n N)
P nN Bn .
n
(Bn , n N) vn = P p=1 B p
P () = 0
(Bn , n N)
P nN Bn .
P (B B c ) = P (B) + P (B c ) B
B c B B c = , P (B B c ) = P () = 1
P (B c ) = 1 P (B)
17
Probability for Finance Probability spaces and random variables
Card() = N A = P() ;
A
1
, P () =
N
[0; 1] [0; 1]
R2 ;
A
, P (A) A P P () = 1;
P
[0; 1] [0; 1]
B = [a; b] [c; d] (d c)(b a) 1.
B (d c)(b a).
(, A, P )
B
A
P ()
P ({})
18
Probability for Finance Probability spaces and random variables
B1 , B2 A P (B1 B2 ) =
P (B1 ) P (B2 ).
B2 A P (B2 ) = 0 B1
B2 P (B1 |B2 ),
P (B1 B2 )
P (B1 |B2 ) =
P (B2 )
B2
B2 . B1
B2 ,
. B1 B2 = , B1
B1
B1 B2
B2 B1 .
B1 B2
P (B1 B2 ) P (B1 ) P (B2 )
P (B1 |B2 ) = = = P (B1 )
P (B2 ) P (B2 )
= [0; 1] [0; 1]
(x, y) B1 = 0; 12
1
3
; 1 B2 = 0; 13 0; 12 ;
1 2 1
P (B1 ) = =
2 3 3
1 1 1
P (B2 ) = =
3 2 6
19
Probability for Finance Probability spaces and random variables
B2 (x, y) B1 x 0; 13 y
1/3 13 ; 12 . (x, y) B2
y 12 . (x, y)
B1 y 13,
y 0; 12 1/3
y 13 ; 12 .
P (B1 |B2 ) = 13 B1 B2 = 0; 13 13 ; 12 ,
1 1 1 1
P (B1 B2 ) = 0 =
3 2 3 18
1
18 1
P (B1 |B2 ) = 1 = = P (B1 )
6
3
B1 B2 .
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20
Probability for Finance Probability spaces and random variables
B1 B2
B1 ,
B2 B1
G G A
B G, B G , P (B B ) = P (B) P (B )
G G
P()
(, A).
.
B A AB
AB = A B A A ;
AB B. (B, AB )
21
Probability for Finance Probability spaces and random variables
B AB B = B (Cn , n N)
Cn = An B
Cn = An B = An B
nN nN nN
A An A
nN nN An B AB
C = A B AB CBc C B.
c
CBc = A B B = Ac B Bc B
= Ac B AB
B P (B) = 0
P (. |B ), P (B1 |B ) B1 ,
(B, AB ) .
P (B |B ) = 1. (Cn , n N)
AB
P nN Cn B P nN (Cn B)
P Cn |B = =
nN
P (B) P (B)
n, Cn B,
P nN Cn nN P (Cn ) nN P (Cn B)
= = = P (Cn |B )
P (B) P (B) P (B) nN
t B.
22
Probability for Finance Probability spaces and random variables
(B, AB , P (. |B )).
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23
Probability for Finance Probability spaces and random variables
(B1 , B2 , ..., Bn ) C A,
P (C |Bj )P (Bj )
P (Bj |C ) = n
i=1 P (C |Bi )P (Bi )
Bj
n
C= C Bi
i=1
n
n
P (C) = P C Bi = P (C |Bi )P (Bi )
i=1 i=1
P C Bj = P (C |Bj )P (Bj ) = P (Bj |C )P (C)
24
Probability for Finance Probability spaces and random variables
P (C)
C
B1 B2 = B1c
P (C |B1 )P (B1 )
P (B1 |C ) =
P (C |B1 )P (B1 ) + P (C |B2 )P (B2 )
P (B1 ) = 104
P (C |B1 ) = 0.99
P (C |B2 ) = 0.01
0.99 104
P (B1 |C ) = 0.01
0.99 104 + 0.01 (1 104 )
T = 1
R+
R
(S S )/S ,
ln(S /S ), .
25
Probability for Finance Probability spaces and random variables
[2%; 2%]
(, A) (E, B)
E X E
B B, X 1 (B) A
X 1 (B) X 1 (B) = { / X() B} . X
A
X E = R
A.
A) PX BR
PX (B) = P (X 1 (B)) .
X
B PX (B)
E
R Rn
R+ N E R
E = Rn
A . X
X B = [2%; +2%] ,
X 1 (B)
A
X (, A)
(E, B) . X BX A
BX = A A / B B , A = X 1 (B)
26
Probability for Finance Probability spaces and random variables
BX A,
A
A
X
t Ft
s > t.
Ft Fs
uu ud
A = P,
R
A.
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Probability for Finance Probability spaces and random variables
Card() =
4 X, Y
X
X()
Y () = 2.
2 4 Y
X.
X Y
1
2
3
4
X Y
BX = P()
BY = {, , { 1 } , { 2 , 4 } , { 3 } , { 1 , 3 } , { 1 , 2 , 4 } , { 3 , 2 , 4 }}
BY Y
St t
uSt1 p
St =
dSt1 1 p
= {uu; ud; du; dd}
S0
B0 = {, } .
.
1, S1
{du; dd} {uu; ud}
B1
B1 = {, , {du; dd} , {uu; ud}}
28
Probability for Finance Probability spaces and random variables
B0 B0 B1 .
B1
S2 = udS0 . S1
.
B2
(S1 , S2 ) S2 . BS
S1 S2 .
A B P (A B) = P (A) P (B)
X Y (, A, P )
(E, B) (A, B) B 2 ,
X 1 (A) Y 1 (B)
= { 1 , 2 , 3 , 4 } A = P()
X Y
1 1
1 2
(X, Y ) = 1
2
1 1
Y = 1, X
1 4 Y = 2,
X 2 3 .
Y BX
X Y
X Y
X Y aX bY a
29
Probability for Finance Probability spaces and random variables
X Y
BX BY .
X
(, A) (R, BR ) X
BR
P A
X (, A)
(E, B) ;
X PX B,
B B, PX (B) = P X 1 (B) = P ({ / X() B})
(E, B) = (R, BR ) , X
FX , R [0; 1]
30
Probability for Finance Probability spaces and random variables
X()
() 3() 3()
= 35
= 63
= 21 1
() 120 () 120 () 120 120
A
PX
P
X
nk = k!(nk)!
n!
k
n 10
3
10!
= 3!(103)! = 120 .
1
A = P() P () = 120 .
PX X
{X = k} k = 0, ..., 3
P (X = 3) =
1
120
. {X = 2} ,
P (X = 2) = 37 120
. {X = 1}
72 = 21
7
10 P (X = 1) = 120 . P (X = 0) =
63
3
/ 3 = 35/120.
63 + 35 + 21 + 1 = 120
{X = k} { X() = k}.
31
Probability for Finance Probability spaces and random variables
(, A, P )
PX BX
A BX A.
FX
X
FX B1 B2
P (B1 ) P (B2 )) x y, (; x] (; y] PX ((; x])
PX ((; y]) .
FX (x)
(; x] , (xn , n N)
x Bn = (; xn ]
B = (; x] .
+ n
P (X x) = 1 FX (x) = 0.99
|x| .
32
x X Y.
X
Y,
x R, FX (x) FY (x)
FX FY X Y.
X Y
X Y,
x,
x X Y.
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Probability for Finance Probability spaces and random variables
X
(xn , n N)
P ({ / X() = xn }) = P (X = xn ) = 1
nN nN
(xn , n N) X.
Y
fY
x
FY (x) = fY (y)dy
FY Y. fY Y
.
+
fY (y)dy = 1
X
X.
B A B,
B
B () = 1 B
= 0
B.
K = 1000 XT
T. 100
{XT 1000} {XT 1000} = { / XT () 1000} .
34
Probability for Finance Probability spaces and random variables
X {x1 , ..., xn } ,
xi = xj i = j = {B1 , ..., Bn }
n
X= xi Bi
i=1
Bi = { / X() = xi } , i =
1, 2, ..., n.
Card() = N X( i ) = xi
N
X= xi { }
i
i=1
Card() < +
{ }
i
X,
Y = g(X) g
g
K T,
YT = g(XT ) = max(XT K; 0) XT
T
35
Probability for Finance Probability spaces and random variables
Xt t.
[0; t]
Xt
Yt = ln = ln(Xt )
1
fX
fY
X fX g
R R fY
Y = g(X)
fX (g 1 (x))
fY (x) = x Y ()
|g (g 1 (x))|
= 0
Y () = {y R / y = Y () } .
36
Probability for Finance Moments of a random variable
37
Probability for Finance Moments of a random variable
4021
40 63
1 40 21 40 63
$40 +$ +$ = $1
120 21 120 63 120
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38
Probability for Finance Moments of a random variable
X
{x1 , ..., xn } , xi R i. pi = P (X = xi ) i = 1, ..., n;
X P
E(X),
n
E(X) = xi pi
i=1
X fX FX
X P
E(X),
+ +
E(X) = xfX (x)dt = xdFX (x)
n xi
X =
B E(X) = E(B ) = P (B).
X ni=1 xi Bi Bi = {X = xi } ,
n n n
E(X) = E xi Bi = xi E (Bi ) = xi pi
i=1 i=1 i=1
EP E
P. E
P,
Q.
EP EQ .
X Y X + Y
39
Probability for Finance Moments of a random variable
V
(, A, P ) X
X E(X) XdP,
E(X) = XdP = sup {E(Y ), Y X}
Y V
E(Y ) Y V Y
X
X.
XdP, E(X)
x
FX X
P. .
X
X
X = X+ X
V
f sup f (x)
f(x) x A.
40
Probability for Finance Moments of a random variable
X X
E(X),
X + X
E(X)
X P,
P E(X)
E (|X|) |X| = X + + X
X, Z A, B
A
X = A E(X) = P (A)
0 X Z 0 E(X) E(Z)
{X 0 A B} E (XA ) E (XB )
c R, E(cX) = cE(X)
E(X + Z) = E(X) + E(Z)
|E(X)| E (|X|)
X = A P (A)
1 P (A)
E(X) = P (A)
Y = 0 V
E(X) E(Y ) = 0.
Z X,
E(Z) E(X).
A B X 0, XA XB
41
Probability for Finance Moments of a random variable
X V X
c > 0. X cX X + X (cX)+ (cX) .
c (cX) = cX + (cX)+ = cX
E(cX) = E (cX)+ E (cX)
= cE X + cE X +
= c (E(X)) = cE(X)
X X + X
(x1 , x2 , ..., xn ) X
n
E(X) x = n1 xi .
i=1
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Probability for Finance Moments of a random variable
X E [u(X)]
u
50 = 12 (0 + 100)
E(X)
X.
E [u(X)] u [E(X)]
X u(X)
X u
R R u(X)
E [u(X)] u [E(X)]
x1 x2 p 1 p.
u(x)
(x1 , u(x1 )) (x2 , u(x2 )).
f (x, y) [0; 1] , f(x + (1 )y)
f (x) + (1 )f(y)
43
Probability for Finance Moments of a random variable
u
u X
X
u > 0
u < 0
2n
n
N
1/2. P (N = n) = 21n
n 1
2n.
X
+
+
n 1
E(X) = 2 P (N = n) = 2n = +
n=1 n=1
2n
44
Probability for Finance Moments of a random variable
+
+
1 n
E(ln(X)) = ln(2n ) n
= ln(2)
n=1
2 n=1
2n
+
+
+
n 1
n
= =2
n=1
2 n=1 k=n
2k
E(ln(X)) = 2 ln(2) = ln(4)
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Probability for Finance Moments of a random variable
X.
X,
2 (X)
2 (X) = E(X 2 )
2 (X) X
X
X, V (X) 2 (X)
V (X) = 2 (X) = E (X E(X))2
V (X) Y =
X E(X), V (X) = 2 (Y ). Y
E(Y ) = 0
X
V (X) = E (X E(X))2 = E(X 2 ) E(X)2
E (X E(X))2 = E X 2 2XE(X) + E(X)2
= E X 2 2E [XE(X)] + E(X)2
= E(X 2 ) 2E(X)2 + E(X)2
= E(X 2 ) E(X)2
46
Probability for Finance Moments of a random variable
card() = P () = 0.25 , X
2
3
X= 1
0
E(X) = 1 Y = X E(X)
1
2
Y = 2
1
X Y
V (X) = V (Y ) = 0, 25 12 + 22 + (2)2 + (1)2 = 2.5
V (X) = V (X + c)
c.
(x1 , x2 , ...., xn) X
n
2 1
s = (xi x)2
n 1 i=1
n 1 n
X x.
X
X, (X) V (X)
(X) = V (X)
47
Probability for Finance Moments of a random variable
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48
Probability for Finance Moments of a random variable
n X,
n (X)
n (X) = E(X n )
X
3. X, Sk(X)
3 (X E(X))
Sk(X) =
(X)3
(x1 , x2 , ...., xn )
X, Sk(X)
n xi x 3
=
Sk
(n 1)(n 2) s
Sk = 0.73
49
Probability for Finance Moments of a random variable
X
4 (X E(X))
(X) =
4
X
e(X) = (X) 3
= 3.
(X)
(X) =
8.93
L0 (, A) (, A).
, (X + Y ) () = X() + Y ()
, c R, (cX)() = cX()
L0 (, A)
P .
P
50
Probability for Finance Moments of a random variable
n Rn x y,
d(x, y) x y
d Rn
Rn ,
n
x=y (xi yi )2 = 0
i=1
xi = yi i = 1, ..., n.
[a; b] .
b
d(f, g) = |f(x) g(x)| dx
a
d(f, g) = 0
f = g f(x) = 0 [a; b] g(x) = 0 [a; b[ g(b) = 1.
d(f, g) = 0 f g
f g
R
f Rg f g
R f Rf f Rg
gRf) f Rg gRh f Rh)
d
R
[a; b] . f g
f g, d(f, g)
(f, g) f g.
d S S S R d(x, y) = 0
x = y d(x, y) = d(y, x) d(x, z) d(x, y) + d(y, z)
51
Probability for Finance Moments of a random variable
L1 (, A, P )
P
(, A, P ).
X Y (, A, P )
P
P
R
L1 (, A, P )
/X()
P (XRY X == = 1
Y YP())
X = Y a.s P (X = Y ) = 1
(, A, P ) A A P
P (A) = 0.
L1 (, A, P ) P
(, A, P ).
R L1 (, A, P )
XRY X = Y P
P P
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Probability for Finance Moments of a random variable
L1 (, A, P )
L1 (, A, P ) R
L1 (, A, P ). L0 (, A, P ) R
L0 (, A).
L1 (, A, P ) L0 (, A, P ).
L1 (, A, P ) R+ , X X1
X X1 = E(|X|)
L1 R X E(X), X
E(X),
L1 (, A, P ) L0 (, A, P )
X X1 X1 = 0 X = 0 P
X + Y 1 X1 + Y 1
X1 = || X1
L
S S R , .
x = 0 x = 0
x S, c R, cx = |c| x
(x, y) S S, x + y x + y
53
Probability for Finance Moments of a random variable
L1 (, A, P ))
d1 (X, Y ) = X Y 1 , L1 (, A, P )
d1 L1
(Xn , n N )
L1 X L1
L
Xn X.
L1
Rn
L1 .
L2(, A, P )
L2 (, A, P )
L2 (, A, P )
L2 (, A, P )
L2 (, A, P ) L1 (, A, P )
X Y L2 (, A, P ) XY
L1 (, A, P ).
54
Probability for Finance Moments of a random variable
Z = X + tY t R
E Z 2 = E X 2 + 2tXY + t2 Y 2 0
= E X 2 + 2tE (XY ) + t2 E Y 2
t.
= E (XY )2 E X 2 E Y 2
X
Y L2 . XY
L2 .
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Probability for Finance Moments of a random variable
L2 L2 R ., .
(X, Y ) X, Y = E(XY )
L2 .
X2 = X, X = E(X 2 )
d2 d2 (X, Y ) = X Y 2 .
., . X, X = E(X 2 ) > 0 X
P
L1 , L2
L2
(Xn , n N ) L2 X L2
lim E (Xn X)2 = 0
n+
L2
L2 Rn ,
L2 .
R2 , f : R2 R
x R2 , f (x) = a1 x1 + a2 x2
a1 a2 x = (x1 , x2 ).
(a1 , a2 ) f. a = (a1 , a2 )
x R2 f(x)
H
H
H
56
Probability for Finance Moments of a random variable
a x. f
R2 R a R2 .
L2 (, A, P ).
f L2 R
Yf L2 X L2
f (X) = X, Yf = E(XYf )
X f (X)
X f (X)
Card() = N
Yf
N
f (X) = X, Yf = E(XYf ) = X( i )Yf ( i )P ( i )
i=1
X = ei = {i } ,
i .
f (ei ) = ei , Yf = P ( i )Yf ( i )
f (ei )
i .
P ( i ) Yf ( i ). Yf ( i )
f(ei )
Yf ( i )
Yf ( i )
Yf ( i )
i X,
N
X= xi ei
i=1
X( i ) = xi .
N
N
f (X) = X, Yf = xi f (ei ) = xi Yf ( i )P ( i )
i=1 i=1
R , x y
< x, y >= x y .
57
C C
z)
Probability for Finance Moments of a random variable
L2
x R2 C
R2 . C z C
x. z x C.
y y.
x z y z 90 270 .
< x z, y z > 0
C C
z)
A
[0; 1] , (x, y) A A, x + (1 )y A.
R , x y < x, y > / x . y .
58
Probability for Finance Moments of a random variable
R2
C L2 X L2 .
Z C
X Z, Y Z 0 Y C
Z X C.
59
Probability for Finance Moments of a random variable
X Y L2 (, A, P )
X Y, Cov(X, Y ) XY )
cov(X, Y ) = E [(X E(X)) (Y E(Y ))]
X Y
X() Y ()
1
2
3
4
X Y
E(X) = E(Y ) = 2.
1
cov(X, Y ) = (1 1 + (2) (1) + 1 (1) + 2 1) = 0.5
4
P
X Y.
a, b, c, d
X, Y, Z, W
Cov(aX, Y ) = aCov(X, Y ).
60
Probability for Finance Moments of a random variable
V (X + Y ) = V (X) + V (Y ) + 2Cov (X, Y )
Cov (X, X) = V (X).
Cov (X, Y )
X Y.
X Y L2 ;
X Y XY ,
Cov(X, Y )
XY =
(X)(Y )
(X) (Y ) X Y.
X Y
XY Cov( (X) , (Y )
),
X Y
X, Y
XY =
X2 Y 2
XY
X Y.
1
(X) = ((1)2 + (2)2 + (1)2 + (2)2 ) = 2.5 = 1.58
4
1
(Y ) = ((1)2 + (1)2 + (1)2 + (1)2 ) = 1
4
0.5
XY = = 0.316
1.58
61
Probability for Finance Moments of a random variable
X Y
X Z L2 a, b, c, d
Cov(aX + b, cZ + d) = ac Cov(X, Z)
aX+b,cZ+d = sign(ac) XZ
Y
W
(aX + b) = |a| (X) (cY + d) = |c| (Y )
62
Probability for Finance Moments of a random variable
X Y L2
X1
X1
X0 = 90
1
E (X1 ) = [0 + 200] = 100
2
E (X1 )
X0 = = 90
1 + Riskpremium
X0
63
Probability for Finance Moments of a random variable
Q P
X0 = EQ (X1 )
= { 1 , 2 } , X1 ( 1 ) = 200 X1 ( 2 ) = 0.
Q( 1 ) = q1 = 0.45
Q( 2 ) = q2 = 1 q1 = 0.55
EQ (X1 ) = 90 = X0 .
Q
q1 200 + q2 0 = 90
q1 + q2 = 1
Q X0 = EQ (X1 ).
Q( 1 ) = 0.3.
Q Y0 = EQ (Y1 ).
150Q ( 1 ) + 110 (1 Q ( 1 )) = 120
64
Probability for Finance Moments of a random variable
Q ( 1 ) = 0.25.
Q Q
Q Q
(X0 , Y0 )
200 150 1 0
X + Y + Z =
100 110 1 0
X = 2; Y = 5; Z = 350
200 150 1 0
2 +5 350 =
100 110 1 0
X1
Y1 , X0 Y0
2X0 + 5Y0 = 350.
Y1
Y0 = 122.
65
Probability for Finance Moments of a random variable
Q( 1 ) = 12
40
= 0.3.
Q
Q
Q
r
1+r
1
, X1
1
X0 = EQ (X1 )
1+r
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66
Probability for Finance Moments of a random variable
{}
1
P ( 1 ) > 0
A11 ,
A10 P ( 1 ),
A10 = EQ (A11 ) ,
EQ (A11 ) = Q( 1 ).
P Q.
Q
P
B A, P (B) = 0 Q(B) = 0
Q << P.
P Q
B A, P (B) = 0 Q(B) = 0
Q << P P << Q.
67
Probability for Finance Moments of a random variable
Q << P A
B A, Q(B) = dP
B
P (B) = 0 Q(B) = 0
,
Q(B) = B dP, = dQ dP
Q
P. P Q dQ
dP
dQ
dP
dQ dP
= 1/
dP dQ
P Q (, A)
= dQ
dP
.
EQ (X1 ) = E (X1 )
X1 EQ (X1 ) X1 .
P X1 E (X1 ) = , X1
L2 (, A, P ) .
Card() = N A = P () P () > 0
Q({}) = dP = ()P ()
{}
Q()
() =
P ()
68
n
(, A, P ) (Rn , BRn ) . X =
(X1 , ...., Xn ) Xi
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69
Probability for Finance Moments of a random variable
X = (X1 , ...., Xn )
FX Rn [0; 1]
x Rn (x1 , x2 .., xn ) .
Xi X
fX Rn R
x x xn
FX (x) = ... fX (x)dx1 ...dxn
E(X)
Xi X
V (X1 ) ... Cov(X1 , Xj ) Cov(X1 , Xn )
X = Cov(Xj , X1 )
V (Xj )
Cov(Xn , X1 ) V (Xn )
X
2
1 ... 1j 1n
X = j1 2
j
n1 2n
X n
U, W n Rn .
E(U X) = U E(X)
E (U X, W X) = U E(XX )W
V (U X) = U X U
CoV (U X, W X) = U X W
70
Probability for Finance Moments of a random variable
n U X =
i=1 Ui Xi V (U X) X (n, n)
XX n n E(XX ) n n
E(Xi Xj )
n X
U Rn n
U, R,
n
R=UX= Ui Xi
i=1
E(R) = U E(X)
V (R) = U X U
E(X)
U
n
Ui = 1
i=1
U =1 Rn
e.
X
(n, n) M x R , x = 0 x Mx > 0.
71
Probability for Finance Moments of a random variable
1
min U X U
2
U E(X) = e
U =1
12
1
L (U, , ) = U X U + (e U E(X)) + (1 U )
2
X = E(X) =
L
= U =
U
L
= e U =
L
= 1 U =
U = 1 +1
e = 1 + 1
1 = 1 + 1
1
U= (eC A)1 +(b eA)1
D
A = 1
B = 1
C = 1
D = BC A2
x x 1 x
Rn x, y = x 1 y.
D
72
Probability for Finance Usual probability distributions in financial models
2 , t
X
p X p 1 p.
73
Probability for Finance Usual probability distributions in financial models
B A P (B) = p, B
p.
B B(p)
X a b (a > b)
p 1 p, Y = ab 1
(X b)
p 1 p. Y B(p).
ln(u)
ln(d) u up d down).
S0 , S1 , uS0 dS0 .
ln(S1 ) = ln(S0 ) + X
X ln(u) ln(d).
B = {SPT K}
SPT T
K
P (B).
X B(p), E(X) = p 2 (X) = p(1 p)
X
p, E(X)
E(X) = p 1 + (1 p) 0 = p
X, 2 (X)
2 (X) = E(X 2 ) E(X)2 = p p2 = p(1 p)
X = X .
74
Probability for Finance Usual probability distributions in financial models
Y y1 y2
p (1 p).
2 (Y ) = p(1 p)(y1 y2 )2
1
X = y y
(Y y2 ) B(p)
Y = (y1 y2 )X + y2
Y
y1 = ln(u) y2 = ln(d).
u 2
2 (Y ) = p(1 p) ln
d
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75
Probability for Finance Usual probability distributions in financial models
u d
X
n p X n
Xi , i = 1, ..., n, B(p).
n k
P (X = k) = p (1 p)nk
k
nk = k!(nk)!n!
k n.
X B(n, p).
S
St t , (t + 1)
St+1 = St Xt+1
Xt+1 u d p 1 p.
Xt St
t
St = S0 Xs
s=1
t
St
ln = ln(Xs )
S0 s=1
s = 0 s = t
t
ln(u) ln(d) p 1 p.
76
Probability for Finance Usual probability distributions in financial models
ln(St ) B(n, p)
n k
P (ln(St ) = ln(S0 ) + k u) = p (1 p)tk
k
nk
k t k
B(n, p) n
B(p)).
X B(n, p)
n
t
St
E ln = t (p ln (u) + (1 p) ln(d))
S0
u 2
2 St
ln = tp(1 p) ln
S0 d
StStSt .
77
Probability for Finance Usual probability distributions in financial models
X
X
k
k N, P (X = k)= exp()
k!
X P().
P(2).
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78
Probability for Finance Usual probability distributions in financial models
P(2)
xk
ex = +
k=0 k! .
+
+
+
k k
E(X) = kP (X = k) = k exp() = exp() k
k! k!
k=0 k=0 k=1
+
+ k
k1
= exp() = exp() = exp() exp() =
k=1
(k 1)! k=0
k!
+
k
2 (X) = E(X 2 ) E(X)2 = exp() k2 2
k=0
k!
79
Probability for Finance Usual probability distributions in financial models
+
k +
k +
2 2 k1
k = k = k
k=0
k! k=1
k! k=1
(k 1)!
+
+
k1 k1
= (k 1) +
(k 1)! (k 1)!
k=1 k=1
+ k
+ k
2
= +
k! k=0k=0
k!
2
= + exp()
2 (X) = .
P()
B(n, p) n p
n
p
np np(1 p)
np(1 p) np
p
= np.
P(),
80
Probability for Finance Usual probability distributions in financial models
X [a; b] ,
a < b, fX
1
ba
x [a; b]
fX (x) =
0
X U([a; b]).
FX ) X
xa
ba x [a; b]
FX (x) = 0 x < a
1 x > b
[0; 1] .
[c; d]
[a; b]
dc
PX ([c; d]) = PX (]c; d]) = = FX (d) FX (c)
ba
[a; b]
a b.
(ba)
X U([a; b]) E(X) = b+a
2
2 (X) = 12
X [a; b] , X
+ b 2 b
1 1 x
E(X) = xfX (x)dx = xdx =
ba a ba 2 a
2 2
1 (b a ) b+a
= =
2 ba 2
81
Probability for Finance Usual probability distributions in financial models
[0; 1]
+ 2 3 b 2
2 2 b+a 1 x b+a
(X) = x fX (x)dx =
2 ba 3 a 2
1 (b a3 ) 1 2
3
= (a + 2ab + b2 )
3 ba 4
1 2 1
= (a + ab + b2 ) (a2 + 2ab + b2 )
3 4
(b a)2
=
12
82
Probability for Finance Usual probability distributions in financial models
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83
Probability for Finance Usual probability distributions in financial models
X m
X N (m, )) fX
2
1 1 xm
fX (x) = exp
2 2
fX
x = m
2/3
[m ; m + ]
[m 2; m + 2] .
N (0, 1)
N (0, 1)
2 ,
84
Probability for Finance Usual probability distributions in financial models
X N (m, 2 ), E(X) = m 2 (X) = 2
+ 2
1 1 xm
E(X) = x exp dx
2 2
y = xm
,
+
1 1 2
E(X) = (y + m) exp y dy
2 2
+ +
1 2 m 1 2
= y exp y dy + exp y dy
2 2 2 2
+
1
= exp y 2 +m=m
2 2
E(X) = m. exp 12 y 2
y = xm
+
2 1 1 2
(X) = (y + m) exp y dy m2
2
2 2
2 +
2 1 2 2m + 1 2
= y exp y dx + y exp y dx
2 2 2 2
0
2m) ;
+
2 1 2
y y exp y dx
2 2
+
+
2 1 2 1 2
= y exp y exp y dx
2 2 2
+ +
1 1 1 1
= 2 y exp y 2 + exp y 2 dx
2 2 2 2
1. 2 (X) = 2 .
85
Probability for Finance Usual probability distributions in financial models
0 t
r = ln SSt St t (t > 0).
St = S0 er
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86
Probability for Finance Usual probability distributions in financial models
X m
2 ln(X) N (m, 2 ). X
2
1 ln(x)m
1
exp 2
x > 0
fX (x) = x 2
0
X LN (m, 2 ).
m = 0 = 1
87
Probability for Finance Usual probability distributions in financial models
X LN (m, 2 ), E(X) = exp m + 2
2 (X) =
exp (2m + 2 ) (exp( 2 ) 1))
2
+
1 1 ln(x) m
E(X) = exp dx
2 0 2
y = ln(x),
2
+
1 1 ym
E(X) = exp(y) exp dy
2 2
+
1 1 (y (m + 2 ))2 2
E(X) = exp exp m + dy
2 2 2 2
2
= exp m +
2
(m + 2 ) 2 .
V (X) E(X 2 ) =
exp (2(m + 2 )) V (X) = exp (2m + 2 ) (exp( 2 ) 1))
Y N (0, 1) X
2
X = exp m + Y
2
m > 0. X 1
m
X K 1
max(X K; 0)
88
Probability for Finance Usual probability distributions in financial models
E (X K)+ (x)+ = x x > 0 (x)+ = 0
fX X, :
+ +
E (X K)+ = fX (x) max(x K; 0)dx = fX (x)(x K)dx
0 K
+ +
= xfX (x)dx K fX (x)dx
K K
+
= xfX (x)dx KP (X K)
K
+
= xfX (x)dx KP (ln(X) ln(K))
K
X
2
P (ln(X) ln(K)) = P m + Y ln(K)
2
ln(K) m 2
= P Y
N (x)
ln(K) m 2
P (X K) = 1 N
ln(K) + m 2
= N
+ ln(K) + m + 2
xfX (x)dx = em N
K
89
Probability for Finance Usual probability distributions in financial models
m = 3% = 20%.
[900; 1000] .
[1000; 1100]?
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90
Probability for Finance Usual probability distributions in financial models
2 t
2
Y 2 n
Y
n
Y = Xi2
i=1
Xi i,
Xi N (0, 1).
2 (X1 , ....Xn )
(m, 20 ), Y
n
2
Xi m
Y =
j=1
0
2 n
n
20 Y 1
= (Xi m)2
n n j=1
n
m X = n 1
Xi ,
i=1
Y , m X 2
n
2
n 1 n1
1
Xi X
j=1
91
Probability for Finance Usual probability distributions in financial models
2 2
t
Y t
n Y
Z
Y =
X
n
Z X 2
n
92
Probability for Finance Usual probability distributions in financial models
n) n/(n 2)
3(n2)/(n4). n > 4.
n = 6,
Y
X
n
Y = X
n
X1 (X2 ) 2 n1 (n2 )
F (n1 , n2 ) F (n2 , n1 )
F
n1 n2
F
93
Probability for Finance Conditional expectations and Limit theorems
t t + 1,
t.
(, A, P ) = { 1 , 2 , 3 , 4 } , A = P() P ( i ) = 0.25
i = 1, .., 4. X Y
94
Probability for Finance Conditional expectations and Limit theorems
X Y
1 1 1
2 2 1
3 3 2
4 4 2
X Y
1
E(X) = (1 + 2 + 3 + 4) = 2.5
4
1
E(Y ) = (1 + 1 + 2 + 2) = 1.5
4
Y X .
Y () = 1, 1 2 .
{ 1 , 2 } {Y = 1}
{Y = 1} .
1 1
(P ( i |{Y = 1}), i = 1, ..., 4) = ; ; 0; 0
2 2
X
E (X |{Y = 1})
1
E (X |{Y = 1}) = X( i )P ( i |{Y = 1}) = (1 + 2) = 1.5
2
E(X) {Y = 1}
Y
Y. Y,
X 1.5.
95
Probability for Finance Conditional expectations and Limit theorems
X Y
(xi , i = 1, ..., n) (yj , j = 1, ..., p) .
X
{Y = yi } PX|Y (. |yi )
P ({X = x} {Y = yi })
PX|Y (x |yi ) = P (X = x |Y = yi ) =
P ({Y = yi })
P ({Y = yi }) = 0
Y. PX|Y (. |yi )
X.
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96
Probability for Finance Conditional expectations and Limit theorems
fXY ,
fX fY X Y.
y fY (y) > 0,
X {Y = y} fX|Y (. |y )
fXY (x, y)
fX|Y (x |y ) =
fY (y)
X fX B
P (B) = 0 X B
fX (x)
x X(B)
fX (x |B ) = P (B)
0
A.
X
x1 , ..., xN , B A, E(X |B )
N
E(X |B ) = xi P ({X = xi } |B )
i=1
X
fX B A, E(X |B )
+
1
E(X |B ) = xfX (x)dx = xfX (x |B )dx
P (B)
X(B)
97
Probability for Finance Conditional expectations and Limit theorems
{Y = 2}
N
E(X |{Y = 2}) = xi P ({ i } |{Y = 2})
i=1
= 3 P ( 3 |{Y = 2}) + 4 P ( 4 |{Y = 2})
1
= (3 + 4) = 3.5
2
P ( 1 |{Y = 2}) = P ( 2 |{Y = 2}) = 0.
X Y.
Y,
X,
x1 , ..., xN , Y,
y1 , ..., yM , E(X |Y ),
N
{Y = yj } , E(X |Y )() = xi P ({X = xi } |{Y = yj })
i=1
X Y
E(X |Y )
1 1.5
2 1.5
3 3.5
4 3.5
X Y
98
Probability for Finance Conditional expectations and Limit theorems
X Y fX fY
fX|Y (x |y ) .
X {Y = y}
+
E (X |Y = y ) = xfX|Y (x |y )dx
X Y
+
{Y = y} , E(X |Y )() = xfX|Y (x |y )dx
Y {Y = yj }
. E(X |Y )
Y,
Y
E(X |Y ). E(X |Y )
BY .
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99
Probability for Finance Conditional expectations and Limit theorems
( X L1 (, A, P )), B A, B
Z,
B B, E (ZB ) = E (XB )
Z Z Z
E(X |B ).
X
E(X |B ) B.
X B, E(X |B ) = X.
Card() = , P ( i ) = pi i B
B = {, {1 , 2 } , { 3 , 4 } , }
B1 = { 1 , 2 } B2 = { 3 , 4 } X X = (x1 ; x2 ; x3 ; x4 ) .
p1 x1 + p2 x2 = p1 z1 + p2 z2
p3 x3 + p4 x4 = p3 z3 + p4 z4
Card , X
100
Probability for Finance Conditional expectations and Limit theorems
Z (z1 ; z2 ; z3 ; z4 ) .
B1 B2 . Z B
B1 B2 .
z1 = z2
z3 = z4
1
z1 = z2 = [p1 x1 + p2 x2 ] = E (X |B1 )
p1 + p2
1
z3 = z4 = [p3 x3 + p4 x4 ] = E (X |B2 )
p3 + p4
B1 (B2 )
X
B1 (B2 ).
X B, E (X |B )
X.
L2 , A, P )
L2 (, A, P ) .
R2 ,
d(x, y) = (x1 y1 )2 + (x2 y2 )2
x = (x1 , x2 ) y = (y1 , y2 ) .
x R2 , z =
(z1 , z1 ) x.
minz (x1 z1 )2 + (x2 z1 )2
z1 = z2 .
101
Probability for Finance Conditional expectations and Limit theorems
L2 (, A, P )
z1 = x +x
2
. z
x R
2
z x z.
< z x, z >= (z1 x1 )z1 + (z1 x2 )z1
x2 x1 x1 x2
= z1 + z1 = 0
2 2
R2
d (x, y) = p(x1 y1 )2 + q (x2 y2 )2
p + q = 1, p > 0, q > 0.
z1 = px1 + qx2
z1
x
L2
X
L2 (, A, P ) , E(X |B ) B
B L2 (, B, P ) .
L2 (, A, P ) R4 L2 (, B, P )
R2
E(X |B ) X
L2 (, B, P ) . E (X |B )
minZL ,B,P ) E (X Z)2 = minZL ,B,P ) d(X, Z)2 = E (X E (X |B ))2
E (X |B ) B
z1 = z2
z3 = z4
P
PB B L , B, P ).
P B.
102
Probability for Finance Conditional expectations and Limit theorems
E (X Z)2 = p1 (x1 z1 )2 +p2 (x2 z1 )2 +p3 (x3 z3 )2 +p4 (x4 z3 )2
z1 z3
E (X Z)2
= 2 [p1 (x1 z1 ) + p2 (x2 z1 )] = 0
z1
E (X Z)2
= 2 [p3 (x3 z3 ) + p4 (x4 z3 )] = 0
z3
1
z1 = z2 = (p1 x1 + p2 x2 ) = E (X |B ) ( 1 ) = E (X |B ) (2
)
p1 + p2
1
z3 = z4 = (p3 x3 + p4 x4 ) = E (X |B ) ( 3 ) = E (X |B ) (4
)
p3 + p4
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103
Probability for Finance Conditional expectations and Limit theorems
(X, Y ) L2 (, A, P )
B, B A B B
X c R, E (X |B ) = c
(a, b) R2 , E (aX + bY |B ) = aE (X |B ) + bE (Y |B )
X Y, E (X |B ) E (Y |B )
E (E (X |B ) |B ) = E (X |B )
X B E (XY |B ) = X E (Y |B )
X B, E (X |B ) = E(X)
c c .
B
c L2 (, B, P ) .
L2 (, B, P ) L2 (, A, P ) ,
E (X |B ) X L2 (, B , P ) . E (E (X |B ) |B )
L2 (, B, P ) E (X |B )
L2 (, B , P )
L (, B, P )
2
L2 (, B, P ) .
B = {, } E (X |B ) = E(X)
E (E (X |B )) = E (X) B
E (X E(X) |B ) = 0 E(X)
X E(X) Y
L2 (, B, P )
104
Probability for Finance Conditional expectations and Limit theorems
X E(X) Y.
X = (X1 , ...., Xn )
n
ai Xi
i=1
105
Probability for Finance Conditional expectations and Limit theorems
p = 1 n = 2
p = 1 n = 2
12
E (X1 |X2 = x2 ) = m1 + (y2 m2 )
22
2
X |X =x = 21 12
22
12
X |X =x = 21 (1 212 )
x = (x1 , x2 ))
1
1 exp 12 (x m) X (x m)
fX (x1 , x2 ) (2) |Det(X )|
fX |X (x1 |x2 ) = = 2
fX (x2 ) 1 1 x m
exp
2 2
1
2 exp 12 (x m) X (x m)
= 2 2 2
2 1 2 212 exp 2 1 x m
2
2 1 1 x2 m2
= 2 2 exp (x m) X (x m)
2
2 1 2 12 2 2
1 1 22 12
X = 2 2
1 2 212 12 21
1
A = (x m) X (x m),
2
fX (x1 , x2 ) 2 1 ( 22 x1 + 22 m1 + 12 x2 12 m2 )
= 2 2 exp
fX (x2 ) 2 ( 1 2 212 ) 2 22 ( 21 22 212 )
106
Probability
for Finance Conditional
expectations and Limit theorems
12
E (X1 |X2 = x2 ) = m1 + (x2 m2 )
22
2 212
X |X =x = 1 2
2
g
2
1 1 x 1 m1
(x2 m2 )
g(x1 ) = exp
2 2
2 2 1
1
2
2 1 ( 22 x1 + 22 m1 + 12 x2 12 m2 )
= 2 2 exp
2 ( 1 2 212 ) 2 22 ( 21 22 212 )
X |X =x = 21 (1 212 ) X2 = x2
X1
X1
12
107
Probability for Finance Conditional expectations and Limit theorems
L1 L2 .
(Xn , n N) X
(, A, P ) ;
P
(Xn , n N) X Xn X
> 0
lim P (|Xn X| > ) = 0
n+
108
Probability for Finance Conditional expectations and Limit theorems
a.s
(Xn , n N) X Xn X
0 P (0 ) = 1
0 , lim Xn () = X()
n+
PXn PX Xn X (Xn , n N)
L
X Xn X)
f
lim f(x).dPXn (x) = f(x).dPX (x)
n+ R R
X
E(X) = A > 0
1
P (X A)
A
A > 1
X.
X
109
Probability for Finance Conditional expectations and Limit theorems
X L2 (, A, P ) E(X) = m V (X) = 2 ;
B > 0
2
P (|X | B) 2
B
1
P (|X | A)
A2
A X
1
P (X A)
2A2
1
A = 20.01 = 7.0711.
A = 2.32,
110
Probability for Finance Conditional expectations and Limit theorems
(Xn , n N)
),
Zn = n1 ni=1 Xi (Zn , n N)
> 0
2
P (|Zn | )
n2
(Xn , n N)
Xn X X L2 )
limn+ V (Xn X) = 0
n N)
(Xn ,
Zn = n1 ni=1 Xi
(Zn , n N)
E(|Xn |) = +, Zn
K
ri = E(ri ) + ik Fk + i
k=1
111
Probability for Finance Conditional expectations and Limit theorems
ri i, F1 , ..., FK
ik i
k i
i. Cov(Fk , Fj ) = 0
j = k) Cov(Fk , i ) = 0).
Cov(i , m ) = 0 i = m).
N
N N N K N
1 1 1 1
ri = E(ri ) + ik Fk + i
N i=1 N i=1 N i=1 k=1 N i=1
N K
N
N
1 1 1
= E(ri ) + Fk + i
N i=1 k=1
N i=1 ik N i=1
N
1
N i
i=1
(Xn , n N)
p; Tn
n
Xi np
Tn = i=1
np(1 p)
112
Probability for Finance Conditional expectations and Limit theorems
n u d
up
Y = Y1n , ..., Yk(n)
n
, n 1
k(n) n
n, sn = V
2
i=1 Yi . Y
> 0, U = U1n , ..., Uk(n)
n
,n 1
k(n)
V i=1 Yin
lim =1
n+ s2n
Y = Y1n , ..., Yk(n)n
, n 1
Y1 E (Y1 ) , ...., Yk(n) E Yk(n) , n 1
n n n n
k(n) n
n 1, Zn = i=1 Yi
E (Zn ) V (Zn ) 2 = 0 Zn
Z
u d
u d
113
Probability for Finance Bibliography
114
Probability for Finance Bibliography
115