Hi, can you explain the sentence " The expected perturbation due to volatility over each time step is zero, the drift alone determines the expected value of the process after each time step". Why is that the case?HI @SalinaMiao The formula featured in the study note text is correct: dr = k (θ -r)dt + σdw. The displayed blue formula (that is part of the XLS screen) is incorrect (although the calculations are fine), apologies, and should match the text and consequently should appear as follows:
In regard to the calculations, they are in the XLS and explained by Tuckman in Chapter 7 (see below). However, the problem is that the node does not recombine naturally, see difference in values at node[2,1] inside red box:
Which he resolves as follows, I hope this explains(!):