Tuesday, March 27, 2007
Heat Diffusion
The following is just note for my future reference.
Heat diffusion equation is closely related to the financial market. The Black-Scholes equation for option price is just a partial differential equation (PDE) which can be mapped into the Heat diffusion equation which occur backward in time. The Dupire equation is another PDE to determine a unique local volatility function that made the underlying process fit the volatility smile.
The emerging markets debt (Asia 2000) was also modeled by similar equations.
I don't have enough information to construct a model detail enough to calculate for the US sub-prime mortgage problem. But, at least, I believe it can't be something that can be confined.
Heat diffusion equation is closely related to the financial market. The Black-Scholes equation for option price is just a partial differential equation (PDE) which can be mapped into the Heat diffusion equation which occur backward in time. The Dupire equation is another PDE to determine a unique local volatility function that made the underlying process fit the volatility smile.
The emerging markets debt (Asia 2000) was also modeled by similar equations.
I don't have enough information to construct a model detail enough to calculate for the US sub-prime mortgage problem. But, at least, I believe it can't be something that can be confined.
# posted by Lobo @ 7:37 AM 
