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Stochastic calculus
From Wikipedia, the free encyclopedia.

Stochastic calculus is a branch of mathematics that operates on stochastic processes. The operations include integration
and differentiation that involve both deterministic and random (i.e. stochastic) variables. It is used to model systems that
behave randomly.

The most well-known stochastic process to which stochastic calculus is applied is the Wiener process (named in honor of
Norbert Wiener), which is used for modelling Brownian motion as described by Albert Einstein and other physical
diffusion processes in space of particles subject to random forces. More recently, the Wiener process has been widely
applied in financial mathematics to model the evolution in time of stock and bond prices.

The main flavours of stochastic calculus are the Itô calculus and the Malliavin calculus. A possible alternative to the Itô
calculus, the Stratonovich calculus has not met much acceptance to date.

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Categories: Stochastic processes | Financial mathematics | Mathematics stubs

This page was last modified 01:09, 13 June 2005.

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