The Problem with Stock Path Generation

Recently I’ve been reading Benoit Mandelbrot’s book The (Mis)Behavior of Markets: A Fractal View of Financial Turbulence (this is an affiliate link for Amazon, if a purchase is made via this link I will receive a portion of the proceeds). Early in this book Mandelbrot discusses one major issue with the underlying assumption of certain financial simulations. In particular, he mentions the use of the bell curve (i.e. the normal distribution) to create random stock price movements when using stochastic models, such as geometric Brownian motion (GBM), to generate stock paths. In this post, I…