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 | Models to introduce stochastic processes in finance |
| Generating series of correlated random variables |
| Valuation of high growth companies (Moon & Schwartz 2000) |
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Models to introduce stochastic processes in finance »downloadThis workbook illustrates stochastic processes such as Wiener Process, Geometric Brownian Motion, Jump diffusion often used in quantitative finance models. Theory associated with the models can be found, for instance, in Hull, John C., Options, Futures & Other Derivatives. Fourth edition (2000). Prentice-Hall. To generate a new random scenario, press F9 (recalculate). While the simulation uses Excel only, one sheet uses a user-defined VBA function to remove blank lines from the source data of a chart.
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Generating Series of Correlated Random Variables »downloadA frequent requirement in a Monte Carlo simulation is the need to generate series of correlated random numbers with a desired distribution. This Excel/VBA model shows how to generate vectors of random numbers from a multivariate Normal distribution. The model could, for instance, be applied to simulate prices of two assets with a given variance/covariance matrix whose prices follow a Geometric Brownian Motion. In specialized programming languages like MATLAB, C+ such functionality would be provided by a predefined library functions. EXCEL/VBA is very illustrative but would thus not usually be the the language of choice for such a simulation.
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Valuation of High Growth Companies »download |
This model is an pure Excel implementation of a model described by Schwartz and Moon 2000 in their paper "Rationale Pricing of Internet Companies". The tech bubble has burst in the meantime but the approach is very illustrative (though not too practical) for any kind of high growth company. Schwartz/Moon propose a simulation approach with both revenue and growth of revenue being stochastic processes whose volatility and mean approach some long-term equilibrium. After all, such high growth companies often exhibit growth rates that cannot possibly be maintained in the long-run.
Each time the user presses F9 (recalculate), a new scenario is simulated. In many instances the company will not generate enough funds to finance its growth strategy (initial cash resources are used up) and it will go bankrupt as indicated by a bankruptcy line. Model parameters are in the yellow shaded field and can be modified.Article source: Schwartz, Eduardo S. Moon, Mark. Rational Pricing of Internet Companies.. Financial Analysts Journal May/June 2000, p. 62-74
