Applied Stochastic Models and Control for Finance and Insurance
presents at an introductory level some essential stochastic models
applied in economics, finance and insurance. Markov chains, random
walks, stochastic differential equations and other stochastic processes
are used throughout the book and systematically applied to economic and
financial applications. In addition, a dynamic programming framework is
used to deal with some basic optimization problems.
The book begins by introducing problems of economics, finance and
insurance which involve time, uncertainty and risk. A number of cases
are treated in detail, spanning risk management, volatility, memory, the
time structure of preferences, interest rates and yields, etc. The
second and third chapters provide an introduction to stochastic models
and their application. Stochastic differential equations and stochastic
calculus are presented in an intuitive manner, and numerous applications
and exercises are used to facilitate their understanding and their use
in Chapter 3. A number of other processes which are increasingly used in
finance and insurance are introduced in Chapter 4. In the fifth chapter,
ARCH and GARCH models are presented and their application to modeling
volatility is emphasized. An outline of decision-making procedures is
presented in Chapter 6. Furthermore, we also introduce the essentials of
stochastic dynamic programming and control, and provide first steps for
the student who seeks to apply these techniques. Finally, in Chapter 7,
numerical techniques and approximations to stochastic processes are
examined.
This book can be used in business, economics, financial engineering and
decision sciences schools for second year Master's students, as well as
in a number of courses widely given in departments of statistics,
systems and decision sciences.
