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Risk Premia and Financial Modelling Without Measure Transformation

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Abstract

This paper describes a financial market modelling framework that exploits the notion of a deflator. The demonstrations of the deflator measured in units of primary assets form a minimal set of basic financial quantities that completely specify overall market dynamics. Risk premia of asset prices are obtained as a natural consequence of the approach. Contingent claim prices are computed under the real world measure both in the case of complete and incomplete markets.

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File URL: http://www.business.uts.edu.au/qfrc/research/research_papers/rp45.pdf
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Bibliographic Info

Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 45.

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Date of creation: 01 Sep 2000
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Handle: RePEc:uts:rpaper:45

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Keywords: financial market modelling; deflator; risk premium; contingent claim pricing; incomplete market;

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  1. N. Hofmann & E. Platen & M. Schweizer, 1992. "Option Pricing under Incompleteness and Stochastic Volatility," Discussion Paper Serie B 209, University of Bonn, Germany.
  2. L. C. G. Rogers, 1997. "The Potential Approach to the Term Structure of Interest Rates and Foreign Exchange Rates," Mathematical Finance, Wiley Blackwell, vol. 7(2), pages 157-176.
  3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  4. Eckhard Platen, 1999. "A Minimal Share Market Model with Stochastic Volatility," Research Paper Series 21, Quantitative Finance Research Centre, University of Technology, Sydney.
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Cited by:
  1. Wolfgang Hardle & Torsten Kleinow & Alexander Korostelev & Camille Logeay & Eckhard Platen, 2001. "Semiparametric Diffusion Estimation and Application to a Stock Market Model," Research Paper Series 51, Quantitative Finance Research Centre, University of Technology, Sydney.
  2. Rei[ss], Oliver & Schoenmakers, John & Schweizer, Martin, 2007. "From structural assumptions to a link between assets and interest rates," Journal of Economic Dynamics and Control, Elsevier, vol. 31(2), pages 593-612, February.

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