Questions tagged [radon-nikodym]
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11
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Let $\mathbb{P} \sim \mathbb{Q} \sim \mathbb{R}$ be equivalent probability measures on some measurable space
Let $\mathbb{P} \sim \mathbb{Q} \sim \mathbb{R}$ be equivalent probability measures on some measurable space $(\Omega, \mathcal{F})$, and let $\mathcal{G} \subset \mathcal{F}$ be a sub- $\sigma$-...
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On Girsanov Theorem to switch from Risk-Neutral to Stock Numeraire
Summary: long-story cut short, the question is asking for what types of functions $f(.)$, the Cameron-Martin-Girsanov theorem can be used as follows:
$$ \mathbb{E}^{\mathbb{P}^2}[f(W_t)]=\mathbb{E}^{\...
- 6,098
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1
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What is the Radon-Nikodym derivative in the Heston model?
It is clear to me that $$ \frac{dQ}{dP} = e^{-\lambda W_T-\frac{\lambda^2}{2}T}$$ is the Radon-Nikodym derivative that defines the change of measure in the framework described by Black and Sholes. But ...
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Computing Derivative Security with Change of Numeraire
Under Black-Scholes, price a contract worth $S_T^{2}log(S_T)$ at expiration.
This is a question from Joshi's Quant Book (an extension question).
Ok, so I solved this with 3 different methods to make ...
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1
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Change of Numeraire formula
The general change of Numeraire formula gives the following Radon-Nikodym derivative:
$$ \frac{dN_2}{dN_1}(t)|\mathcal{F}_{t_0}=\frac{N_1(t_0)N_2(t)}{N_1(t)N_2(t_0)} $$
I am able to derive this Radon-...
- 6,098
2
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Understanding the asset pricing theory and numeraire
While reading about asset pricing theory and numeraire, I had faced some confusion.
Short summary of asset pricing theory from my book
We start our journey with a risky asset $S_t=\mu S_tdt+\sigma ...
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Are Stochastic Differential Equation diffusion terms always invariant under a change of measure?
I'm struggling with learning change of numeraire, and stochastic differential equations. I'm reading the beginning of Brigo and Mercurio's Interest Rate Models- Theory and Practice, and I'm on the ...
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Understanding Bayes Rule of conditional expectation
Let $\mathcal{F}$ be a $\sigma$-algebra, $P$ and $Q$ be equivalent martingale measures and $\frac{dQ}{dP}$ the Radon Nikodym Derivative.
I learned that $\Bbb{E}_Q[X]=\Bbb{E}_P[\frac{dQ}{dP}X] $, which ...
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The Radon-Nikodym derivative for a sequence of dependent variables
Suppose that a probability space $(\Omega, \Sigma, \mathbb{P})$ is given. Let $W=\{W_n\}_{n\in \mathbb{N}_0}$ be a sequence of $\mathbb{P}$-i.i.d real-valued random variables on $\Omega$. Furthermore, ...
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Association between a random variable and Radon-Nikodym derivative
Suppose that $X$ is a random variable and $\frac{d\mathbb{Q}}{d\mathbb{P}}$ is the Radon-Nikodym derivative. The quantity under consideration is as follows:
\begin{equation}
Cov(X, \frac{d\mathbb{Q}}{...
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Change of numeraire between t1-forward mesure and t2-forward mesure
Let denote $\mathbb{Q}_{t_1}$ the $t_1$-forward mesure associated to zero coupon bond $B(.,t_1)$.
Let denote $\mathbb{Q}_{t_2}$ the $t_2$-forward mesure associated to zero coupon bond $B(.,t_2)$.
I am ...
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