Probability Theory Applications in Finance: Suggested Readings

Summary

The document responds to a request for accessible examples of probability theory in finance. It names papers and articles spanning probability distributions, option-implied distributions, continuous-time random walks, and heavy-tailed sums in insurance and finance. Together, these topics point to uses in modeling asset-price uncertainty, extracting market-implied beliefs, and analyzing extreme outcomes.

The answer offers a reading list rather than explaining or comparing the works. It gives no detail on their mathematical prerequisites, findings, or practical trading applications, so readers must assess suitability and depth themselves. The original question asks for material near undergraduate probability level, but the response does not indicate which suggestions meet that level. It is therefore a starting point for further research, not a tutorial or evidence-based guide to choosing among the references.

Key ideas

• Probability provides a framework for reasoning about uncertainty in finance.
• The suggested readings cover distributions, option-implied probabilities, random walks, and heavy-tailed sums.
• The response does not describe the papers' methods or conclusions.
• Readers need to check each work's difficulty and relevance to their interests.

Tags

# Paper on the use of probability theory in finance?


# Paper on the use of probability theory in finance?












I have taken probability theory course in college and want to see how it is used practically in finance.

What papers should I read? I want it to be not too difficult (undergraduate probability theory course level would be great)

## Answer by user16651 (score 1)

https://quant.stackexchange.com/a/27490

$\,\,\,$Generally, Finance involve some degree of uncertainty, so we need to use probabilistic reasoning in order to make a sound decision. Nowadays, we need to apply modern probability in each part of finance and this issue is too widespread.However, I introduce some useful articles and books:



- The Laplace Distribution and Generalizations: A Revisit with Applications to Communications, Economics, Engineering, and Finance

- Recovering Probability Distributions from Option Prices

- The application of continuous-time random walks in finance and economics

- Large Deviations of Heavy-Tailed Random Sums with Applications in Insurance and Finance

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