On the implied market price of risk under the stochastic numéraire
Nikolai Dokuchaev ()
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Nikolai Dokuchaev: Curtin University
Annals of Finance, 2018, vol. 14, issue 2, 223-251
Abstract This papers addresses the stock option pricing problem in a continuous time market model where there are two stochastic tradable assets, and one of them is selected as a numéraire. An equivalent martingale measure is not unique for this market, and there are non-replicable claims. Some rational choices of the equivalent martingale measures are suggested and discussed, including implied measures calculated from bond prices constructed as a risk-free investment with deterministic payoff at the terminal time. This leads to possibility to infer a implied market price of risk process from observed historical bond prices.
Keywords: Implied parameters; Market price of risk; Random numéraire; Stochastic bond price; Incomplete market (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
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