A Framework for Analyzing Stochastic Jumps in Finance based on Belief and Knowledge

TL;DR

This paper develops a formal logical framework combining belief, knowledge, and stochastic processes to analyze financial jumps and crises based on individual and group beliefs.

Contribution

It introduces a novel formal language IE that integrates stochastic analysis with belief operators, enabling formal reasoning about financial events and crises.

Findings

Formal language IE for stochastic and belief analysis

Representation of financial events as logical formulae

Model construction integrating stochastic processes and beliefs

Abstract

We introduce a formal language IE that is a variant of the language PAL developed in [van Benthem 2011] by adding a belief operator and a common belief operator,specializing to stochastic analysis. A constant symbol in the language denotes a stochastic process so that we can represent several financial events as formulae in the language, which is expected to be clues of analyzing the moments that some stochastic jumps such as financial crises occur based on knowledge and belief of individuals or those shared within groups of individuals. In order to represent beliefs, we use sigma-complete Boolean algebras as generalized sigma-algebras. We use the representation for constructing a model in which the interpretations of the formulae written in the language IE reside. The model also uses some new categories for integrating several components appeared in the theory into one.