Richard P. answered • 04/01/19
Finance
Yes, except the standard models go a little farther and uses continuous time stochastic processes. The formal name for the process is a Gauss-Weiner process.
This kind of stochastic process is the basis of the derivation of the Black-Scholes model for option pricing. The Black-Scholes model is the basic model for pricing stock options.
You may recall that the Nobelist-studded hedge firm "Long Term Capital Management" went bust in 1998. LTCM had such large and complicated liabilities that it would have taken down the global financial system, but for a bail-out arranged by the Federal Reserve with the backing of 16 megabanks and brokerages. The final diagnosis of the problem at LTCM was that the assumption that stock returns are normally distributed (log-normal to be more precise) is demonstrably false. The probability of very large market movements, particularly large negative movements, is larger than a normal probability distribution predicts. When the Asian financial crisis of 1997 was followed by the Russian financial crisis in 1998, LTCM faced a market downturn that the its financial models predicted had extremely small probability.
