by Thomas Deschatre, Xavier Warin
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Suggested foundations for stochastic processes and pricing and financial time series. Specialist prerequisites vary by paper.
Understand what it means to condition on current information.
Follow Brownian dynamics and the second-order term in Itô calculus.
Check whether a relationship can be estimated consistently over time.
Read the fitted relationship and its residuals.
Connect stochastic dynamics to no-arbitrage prices.
Translate continuous dynamics into a numerical experiment.
Study long-run relationships without confusing them with correlation.
Start in discrete time, move to Brownian motion, then read the original pricing argument and simulate it.
Choose a reproducible strategy, specify the trading rule, and test what remains after costs and estimation uncertainty.