The minimal entropy measure and an Esscher transform in an incomplete market model

Michael Monoyios

Statistics & Probability Letters, 2007, vol. 77, issue 11, 1070-1076

Abstract: We consider an incomplete market model with one traded stock and two correlated Brownian motions . The Brownian motion W drives the stock price, whose volatility and Sharpe ratio are adapted to the filtration generated by . We show that the projections of the minimal entropy and minimal martingale measures onto are related by an Esscher transform involving the correlation between , and the mean-variance trade-off process. The result leads to a new formula for the marginal exponential utility-based price of an -measurable European claim.

Keywords: Minimal; entropy; measure; Minimal; martingale; measure; Esscher; transform (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (5)

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