A note on the forward measure

Mark Davis
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Mark Davis: Tokyo-Mitsubishi International plc, 6 Broadgate, London EC2M 2AA, UK

Finance and Stochastics, 1997, vol. 2, issue 1, 19-28

Abstract: For a Markov process $x_t$, the forward measure $P^T$ over the time interval $[0,T]$ is defined by the Radon-Nikodym derivative $dP^T/dP = M\exp(-\int_0^Tc(x_s)ds)$, where $c$ is a given non-negative function and $M$ is the normalizing constant. In this paper, the law of $x_t$ under the forward measure is identified when $x_t$ is a diffusion process or, more generally, a continuous-path Markov process.

Keywords: Risk-neutral measure; Radon-Nikodym derivative; option pricing (search for similar items in EconPapers)
JEL-codes: C63 G13 (search for similar items in EconPapers)
Date: 1997-11-13
Note: received: October 1996; final version received: July 1997
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