Geometric Brownian Motion in R

StackOverflow https://stackoverflow.com/questions/17428858

  •  02-06-2022
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Question

When simulating a Geometric Brownian Motion in R with GBM formula from sde package:

GBM(x, r, sigma, T, N)

"r" is drift in this case, right? Since it says in the package manual "r = interest rate" I'm not sure how to enter the parameter specification - e.g. 5% - would I enter r=5 or r=0.05?

Thanks a lot for your help. Cheers, Ana :)

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Solution

In this case, rate refers to drift rate - the average value at which the average of this process changes. As such, r in this case directly corresponds to the μ that you are used to seeing when discussing Geometric Brownian Motion.

To comply with the vocabulary of the help docs I'd say that entering .05 is correct since that is a rate.

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