The minimal entropy measure and an Esscher transform in an incomplete market model
AbstractWe consider an incomplete market model with one traded stock and two correlated Brownian motions . The Brownian motion W drives the stock price, whose volatility and Sharpe ratio are adapted to the filtration generated by . We show that the projections of the minimal entropy and minimal martingale measures onto are related by an Esscher transform involving the correlation between , and the mean-variance trade-off process. The result leads to a new formula for the marginal exponential utility-based price of an -measurable European claim.
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Bibliographic InfoArticle provided by Elsevier in its journal Statistics & Probability Letters.
Volume (Year): 77 (2007)
Issue (Month): 11 (June)
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Web page: http://www.elsevier.com/wps/find/journaldescription.cws_home/622892/description#description
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