## Documentation Center |

The Brownian Motion (`BM`) model derives directly
from the linear drift (`SDELD`) class:

Create a univariate Brownian motion (`BM`)
object to represent the model:

```
obj = bm(0, 0.3) % (A = Mu, Sigma)
```

obj = Class BM: Brownian Motion ---------------------------------------- Dimensions: State = 1, Brownian = 1 ---------------------------------------- StartTime: 0 StartState: 0 Correlation: 1 Drift: drift rate function F(t,X(t)) Diffusion: diffusion rate function G(t,X(t)) Simulation: simulation method/function simByEuler Mu: 0 Sigma: 0.3

`BM` objects display the parameter `A` as
the more familiar `Mu`.

The `BM` class also provides an overloaded
Euler simulation method that improves run time performance in certain
common situations. This specialized method is invoked automatically
only if all of the following conditions are met:

The expected drift, or trend, rate

`Mu`is a column vector.The volatility rate,

`Sigma`, is a matrix.No end-of-period adjustments and/or processes are made.

If specified, the random noise process

`Z`is a three-dimensional array.If

`Z`is unspecified, the assumed Gaussian correlation structure is a double matrix.

The Constant Elasticity of Variance (`CEV`)
model also derives directly from the linear drift (`SDELD`)
class:

The `CEV` class constrains *A* to
an `NVARS`-by-1 vector of zeros. *D* is
a diagonal matrix whose elements are the corresponding element of
the state vector *X*, raised to an exponent *α*(*t*).

Create a univariate `CEV` object to represent
the model:

```
obj = cev(0.25, 0.5, 0.3) % (B = Return, Alpha, Sigma)
```

obj = Class CEV: Constant Elasticity of Variance ------------------------------------------ Dimensions: State = 1, Brownian = 1 ------------------------------------------ StartTime: 0 StartState: 1 Correlation: 1 Drift: drift rate function F(t,X(t)) Diffusion: diffusion rate function G(t,X(t)) Simulation: simulation method/function simByEuler Return: 0.25 Alpha: 0.5 Sigma: 0.3

`CEV` and `GBM` objects display
the parameter `B` as the more familiar `Return`.

The Geometric Brownian Motion (`GBM`) model
derives directly from the `CEV` model:

Compared to `CEV`, `GBM` constrains
all elements of the *alpha* exponent vector to one
such that *D* is now a diagonal matrix with the state
vector *X* along the main diagonal.

The `GBM` class also provides two simulation
methods that can be used by separable models:

An overloaded Euler simulation method that improves run time performance in certain common situations. This specialized method is invoked automatically only if all of the following conditions are true:

The expected rate of return (

`Return`) is a diagonal matrix.The volatility rate (

`Sigma`) is a matrix.No end-of-period adjustments/processes are made.

If specified, the random noise process

`Z`is a three-dimensional array.If

`Z`is unspecified, the assumed Gaussian correlation structure is a double matrix.

An approximate analytic solution (

`simBySolution`) obtained by applying an Euler approach to the transformed (using Ito's formula) logarithmic process. In general, this is*not*the exact solution to this`GBM`model, as the probability distributions of the simulated and true state vectors are identical*only*for piecewise constant parameters. If the model parameters are piecewise constant over each observation period, the state vector*X*is lognormally distributed and the simulated process is exact for the observation times at which_{t}*X*is sampled._{t}

Create a univariate `GBM` object to represent
the model:

```
obj = gbm(0.25, 0.3) % (B = Return, Sigma)
```

obj = Class GBM: Generalized Geometric Brownian Motion ------------------------------------------------ Dimensions: State = 1, Brownian = 1 ------------------------------------------------ StartTime: 0 StartState: 1 Correlation: 1 Drift: drift rate function F(t,X(t)) Diffusion: diffusion rate function G(t,X(t)) Simulation: simulation method/function simByEuler Return: 0.25 Sigma: 0.3

The `SDEMRD` class derives directly from the `SDEDDO` class.
It provides an interface in which the drift-rate function is expressed
in mean-reverting drift form:

`SDEMRD` objects provide a parametric alternative
to the linear drift form by reparameterizing the general linear drift
such that:

Create an `SDEMRD` object `obj` with
a square root exponent to represent the model:

```
obj = sdemrd(0.2, 0.1, 0.5, 0.05)
% (Speed, Level, Alpha, Sigma)
```

obj = Class SDEMRD: SDE with Mean-Reverting Drift ------------------------------------------- Dimensions: State = 1, Brownian = 1 ------------------------------------------- StartTime: 0 StartState: 1 Correlation: 1 Drift: drift rate function F(t,X(t)) Diffusion: diffusion rate function G(t,X(t)) Simulation: simulation method/function simByEuler Alpha: 0.5 Sigma: 0.05 Level: 0.1 Speed: 0.2

`SDEMRD` objects display the familiar `Speed` and `Level` parameters
instead of `A` and `B`.

The Cox-Ingersoll-Ross (`CIR`) short rate class
derives directly from SDE with mean-reverting drift (`SDEMRD`):

where *D* is a diagonal matrix whose elements
are the square root of the corresponding element of the state vector.

Create a `CIR` object to represent the same
model as in Example: SDEMRD Models:

```
obj = cir(0.2, 0.1, 0.05) % (Speed, Level, Sigma)
```

obj = Class CIR: Cox-Ingersoll-Ross ---------------------------------------- Dimensions: State = 1, Brownian = 1 ---------------------------------------- StartTime: 0 StartState: 1 Correlation: 1 Drift: drift rate function F(t,X(t)) Diffusion: diffusion rate function G(t,X(t)) Simulation: simulation method/function simByEuler Sigma: 0.05 Level: 0.1 Speed: 0.2

Although the last two objects are of different classes, they
represent the same mathematical model. They differ in that you create
the `CIR` object by specifying only three input arguments.
This distinction is reinforced by the fact that the `Alpha` parameter
does not display – it is defined to be `1/2`.

The Hull-White/Vasicek(`HWV`) short rate class
derives directly from SDE with mean-reverting drift (that is, `SDEMRD`):

Using the same parameters as in the previous example, create
an `HWV` object to represent the model:

```
obj = hwv(0.2, 0.1, 0.05) % (Speed, Level, Sigma)
```

obj = Class HWV: Hull-White/Vasicek ---------------------------------------- Dimensions: State = 1, Brownian = 1 ---------------------------------------- StartTime: 0 StartState: 1 Correlation: 1 Drift: drift rate function F(t,X(t)) Diffusion: diffusion rate function G(t,X(t)) Simulation: simulation method/function simByEuler Sigma: 0.05 Level: 0.1 Speed: 0.2

`CIR` and `HWV` constructors
share the same interface and display methods. The only distinction
is that `CIR` and `HWV` models constrain `Alpha` exponents
to `1/2` and `0`, respectively.
Furthermore, the `HWV` class also provides an additional
method that simulates approximate analytic solutions (`simBySolution`) of separable models. This
method simulates the state vector *X _{t}* using
an approximation of the closed-form solution of diagonal drift

When evaluating expressions, all model parameters are assumed
piecewise constant over each simulation period. In general, this is *not* the
exact solution to this `HWV` model, because the probability
distributions of the simulated and true state vectors are identical *only* for
piecewise constant parameters. If *S(t,X _{t})*,

Many references differentiate between Vasicek models and Hull-White
models. Where such distinctions are made, Vasicek parameters are constrained
to be constants, while Hull-White parameters vary deterministically
with time. Think of Vasicek models in this context as constant-coefficient
Hull-White models and equivalently, Hull-White models as time-varying
Vasicek models. However, from an architectural perspective, the distinction
between static and dynamic parameters is trivial. Since both models
share the same general parametric specification as previously described,
a single `HWV` class encompasses the models.

The Heston (`heston`) class derives directly
from SDE from Drift and Diffusion (SDEDDO). Each Heston model is a
bivariate composite model, consisting of two coupled univariate models:

(17-5) |

(17-6) |

Equation 17-5 is typically associated with a price
process. Equation 17-6 represents
the evolution of the price process' variance. Models of type `heston` are
typically used to price equity options.

Create a `heston` object to represent the model:

obj = heston (0.1, 0.2, 0.1, 0.05)

obj = Class HESTON: Heston Bivariate Stochastic Volatility ---------------------------------------------------- Dimensions: State = 2, Brownian = 2 ---------------------------------------------------- StartTime: 0 StartState: 1 (2x1 double array) Correlation: 2x2 diagonal double array Drift: drift rate function F(t,X(t)) Diffusion: diffusion rate function G(t,X(t)) Simulation: simulation method/function simByEuler Return: 0.1 Speed: 0.2 Level: 0.1 Volatility: 0.05

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