A CHANGE OF MEASURE FORMULA FOR RECURSIVE CONDITIONAL EXPECTATIONS

Luca Di Persio (), Alessandro Gnoatto and Marco Patacca ()
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Luca Di Persio: Department of Computer Science, University of Verona, via Ca’ Vignal 2 37129 Verona, Italy
Alessandro Gnoatto: Department of Economics, University of Verona, via Cantarane 24 37129 Verona, Italy
Marco Patacca: Department of Economics, University of Perugia, via A. Pascoli 20 06123 Perugia, Italy

International Journal of Theoretical and Applied Finance (IJTAF), 2024, vol. 27, issue 02, 1-23

Abstract: We derive a representation for the value process associated to the solutions of forward–backward stochastic differential equations in a jump-diffusion setting under multiple probability measures. Motivated by concrete financial problems, the latter representations are then applied to devise a generalization of the change of numéraire technique, allowing to obtain recursive pricing formulas in the presence of nonlinear funding terms due to e.g. collateralization agreements.

Keywords: Pricing; change of measure; BSDE; recursive conditional expectation; nonlinear valuation (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1142/S0219024924500080

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