Title: A Gentle Introduction to Financial Simulation
Abstract: Simulation can be generally defined as experiments using models. In finance, there are many areas that use simulation techniques. These include the generation of artificial data when there are not enough real observations; the generation of scenarios; and the testing of assumptions, concepts, or strategies when real-world experiments are not advisable; to name just a few. Also, simulation can be useful when analytical solutions are not feasible; pricing and risk estimation problems are the usual suspects in this group. Simulations can be used to get a better understanding of the behavior and properties of systems, and to spot the need for adjustments and extensions. Financial models come as econometric or mathematical sets of equations, describing deterministic and stochastic elements and how they relate. More recently, agent-based models for complex dynamic systems have gained importance; these focus on microstructures and investigate how things behave on an aggregate level (e.g., prices). In particular in complex systems, parts of these structures can change: agents can interact and influence each other's behavior, or their environment changes.
Publication Year: 2011
Publication Date: 2011-01-01
Language: en
Type: book-chapter
Indexed In: ['crossref']
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