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The minimal entropy measure and an Esscher transform in an incomplete market model

Abstract:

We consider an incomplete market model with one traded stock and two correlated Brownian motions W, over(W, ̃). The Brownian motion W drives the stock price, whose volatility and Sharpe ratio are adapted to the filtration over(F, ̃) {colon equals} (over(F, ̃)t)0 ≤ t ≤ T generated by over(W, ̃). We show that the projections of the minimal entropy and minimal martingale measures onto over(F, ̃)T are related by an Esscher transform involving the correlation between W, over(W, ̃), and the mean-va...

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Publication status:
Published

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Publisher copy:
10.1016/j.spl.2007.01.008

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Institution:
University of Oxford
Department:
Oxford, MPLS, Mathematical Inst
Role:
Author
Journal:
STATISTICS and PROBABILITY LETTERS
Volume:
77
Issue:
11
Pages:
1070-1076
Publication date:
2007-06-15
DOI:
ISSN:
0167-7152
URN:
uuid:95bfa3a5-a154-43de-ae07-09e2cc2bdecd
Source identifiers:
27584
Local pid:
pubs:27584

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