I have a question to prove martingale under risk-neutral measure:
Question
Consider a discrete time process $S$, which at time $n \in \mathbb{N}$ has value $S_n = S_{0}\prod_{j=1}^{n}Z_j$, $S_0>0$ and $Z_j$ a sequence of independent and identically distributed random variables to either 1.15 or 0.85. Assume a zero risk free rate of rate.
Show that under the risk neutral martingale measure $\mathbb{\hat{P}}$ the process $S_n$ is a martingale.
My thoughts
- I do understand that under the risk neutral measure $\mathbb{\hat{P}}$, which is that $e^{-rt}C_t = \mathbb{\hat{E}}[e^{-rt}C_T|\mathbb{F}_t]$.
- I understand that 1 - period $\mathbb{\hat{P}}$ is that:
- $\mathbb{\hat{P}}_u = \frac{1-0.85}{1.15-0.85}=0.5$, and so is $\mathbb{\hat{P}}_d$ = 0.5.
- I think I seek to prove the martingale property of $S_n$,but I am not sure how is that related to the $\mathbb{\hat{P}}$ if I just want to prove that:
- $\mathbb{E}|S_n|< \infty$
- $\mathbb{E}[S_{n+1}|\mathbb{F}_t]=S_n$