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Price Process Architecture

The Price Process framework is designed to simulate different types of price processes, such as Geometric Brownian Motion or custom formulas. It provides a flexible and extensible structure for implementing various price models used in financial simulations.

Base Class: PriceProcess​

PriceProcess is an abstract base class (ABC) that outlines the general structure and required methods for any price process model.

Initialization​

The constructor of PriceProcess initializes the class with several parameters critical for the price process simulation, such as historical price movements, random states for different elements of the simulation, and a configuration wrapper.

Abstract Methods​

  • derive -> bool: Determines whether a given price process should be used for the specified asset. Must be implemented in subclasses.
  • generate_step -> Tuple[np.ndarray, np.ndarray, np.ndarray]: Implements the logic for generating the price at each step. Must be implemented in subclasses.

Key Methods​

  • generate: Responsible for generating the entire price process.
  • black_swan: Handles the simulation of a black swan event.

Extending PriceProcess​

To create a custom price process, extend the PriceProcess class and implement the abstract methods.

Example: Geometric Brownian Motion (GBM)​

The GBM class is an example of extending the PriceProcess class to implement a Geometric Brownian Motion model.

class GBM(PriceProcess):
    # Constructor and method implementations

Constructor​

Initializes GBM with specific parameters like historical prices, volumes, and mean returns for both prices and volumes.

derive Method​

Determines if this price process should be used for the given asset.

generate_step Method​

Implements the logic for generating the price at each step, for example using the Geometric Brownian Motion formula.

Creating Your Custom Price Process​

To create your own custom price process:

  1. Inherit from PriceProcess: Start by creating a new class that inherits from PriceProcess.
  2. Implement Required Methods: Implement the derive and generate_step methods according to your custom logic.
  3. Initialize Your Class: Define the constructor to initialize your custom class with necessary parameters.
  4. Define Custom Logic: Add any additional methods or logic needed for your specific price process.
class YourCustomProcess(PriceProcess):
    # Constructor and method implementations

Conclusion​

The Price Process framework offers a robust base for simulating various financial price models. By extending PriceProcess, you can create tailored models that fit specific requirements, allowing for diverse and accurate financial simulations.