Quantitative Analysis
Parallel Processing
Numerical Analysis
C++ Multithreading
Python for Excel
Python Utilities
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I. Basic math.
1. Conditional probability.
2. Normal distribution.
A. Definition of normal variable.
B. Linear transformation of random variables.
C. Multivariate normal distribution. Choleski decomposition.
D. Calculus of normal variables.
E. Central limit theorem (CLT).
3. Brownian motion.
4. Poisson process.
5. Ito integral.
6. Ito calculus.
7. Change of measure.
8. Girsanov's theorem.
9. Forward Kolmogorov's equation.
10. Backward Kolmogorov's equation.
11. Optimal control, Bellman equation, Dynamic programming.
II. Pricing and Hedging.
III. Explicit techniques.
IV. Data Analysis.
V. Implementation tools.
VI. Basic Math II.
VII. Implementation tools II.
VIII. Bibliography
Notation. Index. Contents.

Central limit theorem (CLT).

he closeness of normal variables with respect to the linear transformation may be traced to the Central Limit theorem that we introduce in the present section.


(Elementary CLT) If MATH is a collection of iid (independent identically distributed) random variables MATH with a common finite mean $\mu$ and a common finite variance $\sigma^{2}$ then the distribution of MATH converges pointwise to the distribution of MATH as the sample size $N$ approaches infinity:

for some standard normal random variable $\xi$ .

Better versions of CLT are presented in the section ( Central limit theorem (CLT) II ).

To see why CLT is true, consider the following calculation.

Suppose the iid variables $X_{k}$ have the common density $f\left( x\right) $ . We calculate the Fourier transform (=characteristic function) MATH MATH We use independence of $X_{k}$ . MATH We expand the $\exp$ in powers of $\frac{1}{N}$ . MATH We use MATH , MATH ,... MATH We apply the transformation MATH . MATH We utilize MATH , MATH = MATH , MATH , MATH . MATH MATH For a normal distribution MATH we calculate MATH MATH MATH MATH MATH We use MATH . MATH The Fourier transform is an isometry in $L^{2}$ . By comparing (*) with (**) we conclude MATH It still remains to derive the pointwise convergence. We postpone such issues until the section ( Vague convergence ). Advanced versions of CLT are presented in the section ( Central limit theorem (CLT) II ).

Notation. Index. Contents.

Copyright 2007