Stochastic Processes in Financial Valuation and their Computational Demands

Dilip Madan

Abstract: I will survey the successes, failures and demands made by the finance industry in its use of stochastic processes in financial valuation and risk management. The topics commented on include Lévy processes, stochastic volatility models, martingale marginals, local volatility models and their generalization to local Lévy models. The products studied include forward starting options, arithmetic and product cliquets and options on realized quadratic variation.