Change of drift in one-dimensional diffusions

Sascha Desmettre, Gunther Leobacher and L. C. G. Rogers

Papers from arXiv.org

Abstract: It is generally understood that a given one-dimensional diffusion may be transformed by Cameron-Martin-Girsanov measure change into another one-dimensional diffusion with the same volatility but a different drift. But to achieve this we have to know that the change-of-measure local martingale that we write down is a true martingale; we provide a complete characterization of when this happens. This is then used to discuss absence of arbitrage in a generalized Heston model including the case where the Feller condition for the volatility process is violated.

Date: 2019-10, Revised 2020-12
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1910.11904

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