A Stochastic Differential Equation (SDE) is a type of differential equation in which one or more of the terms are stochastic processes, meaning they involve random variables or noise. SDEs are used to model systems that are influenced by random effects or uncertainties, and they are widely applied in various fields, including finance, physics, biology, and engineering.
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A stochastic differential equation specifies infinitesimal drift and random diffusion through a stochastic integral equation.