Principles for modelling financial markets

Eckhard Platen () and Rolando Rebolledo

Published Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: The paper introduces an approach focused towards the modelling of dynamics of financial markets. It is based on the three principles of market clearing, exclusion of instantaneous arbitrage and minimization of increase of arbitrage information. The last principle is equivalent to the minimization of the difference between the risk neutral and the real world probability measures. The application of these principles allows us to identify various market parameters, e.g. the risk-free rate of return. The approach is demonstrated on a simple financial market model, for which the dynamics of a virtual risk-free rate of return can be explicitly computed.

Keywords: stochastic differential equations; martingales; arbitrage information (search for similar items in EconPapers)
Pages: 13 pages
Date: 1996-01-01
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Citations: View citations in EconPapers (20)

Published in: Platen, E. and Rebolledo, R., 1996, "Principles For Modelling Financial Markets", Journal Of Applied Probability, 33(3), 601-613.

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Persistent link: https://EconPapers.repec.org/RePEc:uts:ppaper:1996-3

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