Monte Carlo Simulation

[steve46]

Yes I agree. I would be proud to say I understood everything he put into that one. I don't. Its a very good book to have.

Good luck
Steve

 

[$lave2bmw]

Quote from science_trader:

It's not a method of financial engineering, it's a physics method. People in economics and finance haven't invented anything...

game theory?

 

[gbos]

Quote from WAWTU31:

generate a Brownian motion price path with a given volatility


Would you be so kind to provide an example of how to do this I am seriously interested.

'************************************************************
' standard normal random variate *
'************************************************************
Function gauss()
Dim fac As Double, r As Double, v1 As Double, v2 As Double
10 v1 = 2 * Rnd - 1
v2 = 2 * Rnd - 1
r = v1 ^ 2 + v2 ^ 2
If (r >= 1) Then GoTo 10
fac = Sqr(-2 * Log(r) / r)
gauss = v2 * fac
End Function

 

[gbos]

And a spreadsheet ...

 

[Equalizer]

Quote from ozzy:

http://www.rotman.utoronto.ca/~hull/

His course material is on there if anyone is interested. It's not in detail. But it got me thinking a few months ago when I went over the material.

ozzz

Sheesh! The dude looks like he should down quite a few Drambuies before partying lie a Monkey at Tiger-Tiger

Then again, I'm "Jim Beamed" ar the moment!

 

[WAWTU31]

Quote from gbos:

And a spreadsheet ...

Thank you for replying to the thread I did not receive an alert that you did and thats why it has taken so long for me to say thank you.

 

[uncleTom]

Quote from gbos:

'************************************************************
' standard normal random variate *
'************************************************************
Function gauss()
Dim fac As Double, r As Double, v1 As Double, v2 As Double
10 v1 = 2 * Rnd - 1
v2 = 2 * Rnd - 1
r = v1 ^ 2 + v2 ^ 2
If (r >= 1) Then GoTo 10
fac = Sqr(-2 * Log(r) / r)
gauss = v2 * fac
End Function

Hi guys,

My question is specifically about the Z "variate" value.


Is this just a normal-distributed random number between 0 and 1?


I'm not drawing the connection to Z and the normal distribution.

 

[science_trader]

Z can take values between -infinity and +infinity and is effectively a normal random variable.

 

[waxwing]

Quote from optioncoach:

Other downsides of Monte Carlo is that is assumes constant volatility and has an upward drift. We all are very aware that volatility is never constant and the markets do not always go up.

Steve: Hull is good to have for show in the bookshelf lol....We used it in school and is a great read if your first language is formulas,

Monte Carlo does not assume upward drift, nor anything about volatility; it is a method of simulation (using random numbers and iterating over large numbers of trials) that, as has already been pointed out, is used in Physics as well as finance.
Maybe you're confusing Monte Carlo with Black Scholes? The Black Scholes model posits a drift, but the PDE derived doesn't depend on drift, although yes I think it does assume a fixed vol? (sorry no options expert here..)

 

[uncleTom]

Quote from science_trader:

Z can take values between -infinity and +infinity and is effectively a normal random variable.

I realize this is Statistics 101, but what we're generating is a Z score, or std_devs away from the mean, right?