What is Geometric Brownian Motion?
When making an investment in binary options, the most important element to account for is the fluctuation in price that a particular good or commodity is likely to experience over a specific period of time. If you are able to track the volatility of the price with some degree of accuracy, you are better positioned to predict the price of an option at the point when it expires, significantly increasing your chances of being in the money at the right time and collecting the high level of return. Fortunately, a great deal of research has been conducted in this area by top economists, most notably Myron Scholes and Fischer Black, who composed the famous Black-Scholes formula to help predict market volatility. An important element in their formula is Geometric Brownian Motion, which serves as an approximate model for the fluctuations in price for a commodity when traced on a graph.
Wiener Motion Follows a Stochastic Process
The Brownian motion model, named after Robert Brown, is closely associated with the Wiener process. Both are characterized by a series of seemingly random variables that form a consistent time chart of motion. This type of process, known as a stochastic process, is a useful model for tracking stock prices over time because it includes a degree of randomness that is consistent with the fluctuation of commodity price changes on the market. By taking the Wiener process into account in its formula and harnessing the stochastic process followed by commodity prices over a particular time period, the Black-Scholes formula accounts for a level of randomness in market volatility that makes the formula more reliable. While it is impossible to accurately predict all of the changes that affect a commodity on the market, particularly over a very short period of time, the reliance on Brownian motion and the Wiener process make it easier to make an informed assessment of binary options and the chances of being in the money.
The Stochastic Process Applied to the Real World
While many mathematical formulas, even those that chart real events in the world, are often consigned to the academy and employed primarily by mathematicians working to solve theoretical problems, the Brownian motion model and the Wiener process are widely used by economists today. The Black-Scholes formula, which incorporates the stochastic process, has been employed widely in the world of economics, and contributed substantially to the rise in binary options trading. With the advent of Internet sites that make it easy for people to invest in binary options without paying fees to specialized brokers, the formula gained even more prominence, as more people began to consider binary options as attractive investments. While economists continue to warn that Brownian motion is not a perfect model of stock price volatility, it remains the most reliable model available today.