Probabilistic modelling approach in Quantitative Finance

Question

Explain the Probabilistic modelling approach in Quantitative Finance.

Answer 1

Probabilistic: One of the main assumptions about the financial markets, at least so far as quantitative finance goes; those asset prices are random. We tend to think of explaining financial variables as following several random paths, along with parameters explaining the growth of the asset and degree of asset of randomness.

We efficiently model the asset path via a given rate of growth, on average and its deviation from such average. It approach to modelling has had the greatest influence over the last 30 years, leading to the explosive development of the derivatives markets.