Modeling Asset Price Dynamics

Asset Pricing Models

  1. Dessislava A. Pachamanova PhD1,
  2. Frank J. Fabozzi PhD, CFA, CPA2

Published Online: 15 DEC 2012

DOI: 10.1002/9781118182635.efm0008

Encyclopedia of Financial Models

Encyclopedia of Financial Models

How to Cite

Pachamanova, D. A. and Fabozzi, F. J. 2012. Modeling Asset Price Dynamics. Encyclopedia of Financial Models. .

Author Information

  1. 1

    Associate Professor of Operations Research, Babson College

  2. 2

    Professor of Finance, EDHEC Business School

Publication History

  1. Published Online: 15 DEC 2012


The dynamics of asset price processes in discrete time increments are typically described by two kinds of models: trees (lattices) and random walks. Arithmetic, geometric, and mean reverting random walks are examples of the latter type of models. When the time increment used to model the asset price dynamics becomes infinitely small, we talk about stochastic processes in continuous time. Models for asset price dynamics can incorporate different observed characteristics of an asset price process, such as a drift or a reversion to a mean, and are important building blocks for risk management and financial derivative pricing models.


  • trees;
  • binomial trees;
  • random walks;
  • stochastic processes;
  • continuity;
  • Binomial trees;
  • binomial lattices;
  • difference;
  • white noise;
  • arithmetic random walk with drift;
  • returns;
  • geometric random walk;
  • multiplicative model;
  • mean reversion;
  • Ornstein-Uhlenbeck process;
  • generalized Wiener process;
  • Brownian motion;
  • geometric Brownian motion;
  • differential equations;
  • generalized Wiener process;
  • Ito processes