Risk-Neutral Parameter Shifts and Derivatives Pricing in Discrete Time
We obtain a large class of discrete-time risk-neutral valuation relationships, or "preference-free" derivatives pricing models, by imposing a simple restriction on the state-price density process. The risk-neutral stock-return and forward-rate dynamics are obtained by changing only a location parameter, which can be determined independent of the preference and true location parameters. The Gaussian models of Rubinstein (1976) , Brennan (1979) , and Câmera (2003) , and the gamma model of Heston (1993) are all special cases. The model provides simple relationships between expected returns and state-price density parameters analogous to the diffusion case. Copyright 2004 by The American Finance Association.
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Volume (Year): 59 (2004)
Issue (Month): 5 (October)
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