Error calculus and path sensitivity in financial models

Details Error calculus and path sensitivity in financial models Error calculus and path sensitivity in financial models

2006-10-16

arxiv.org/abs/math/0610489v1

Mathematical Finance 13 (2003) n1, 115-134

Mathematics

Probability

Scientific paper

In the framework of risk management, for the study of the sensitivity of pricing and hedging in stochastic financial models to changes of parameters and to perturbations of the stock prices, we propose an error calculus which is an extension of the Malliavin calculus based on Dirichlet forms. Although useful also in physics, this error calculus is well adapted to stochastic analysis and seems to be the best practicable in finance. This tool is explained here intuitively and with some simple examples.

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