The question is on page 1 and answer's given on page 3. My question is regarding the second bullet point given, where it considers the drift of the lognormal model consistent with empirical evidence. However, on page 11 (Chapter 11 summary) of the course notes, drift is considered inconsistent with the lognormal model. I am wondering which one I should take for the exam. Can anybody help here? Thanks a lot!
Which item in the Chapter Summary are you referring to? Maybe the mean-reverting point? This list covers reasons why the lognormal model may be inappropriate. The mean-reverting behaviour isn't always seen (and can be difficult to quantify). The two sources you've quoted are discussing the advantages and disadvantages of the same model.
Hi Steve, Thanks for looking into this. The bullet point I am referring to from the chapter summary is the second one, where it states the drift parameter may not be constant over time. My confusion is related to the discussion on drift parameter only.
Thanks for the clarification. That second bullet point isn't denying that the share price drifts, it's just saying that the rate of the drift might change over time. The lognormal model assumes that the drift rate is constant. Hope that helps.
