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A note on the forward measure


  • Mark Davis

    (Tokyo-Mitsubishi International plc, 6 Broadgate, London EC2M 2AA, UK)


For a Markov process $x_t$, the forward measure $P^T$ over the time interval $[0,T]$ is defined by the Radon-Nikodym derivative $dP^T/dP = M\exp(-\int_0^Tc(x_s)ds)$, where $c$ is a given non-negative function and $M$ is the normalizing constant. In this paper, the law of $x_t$ under the forward measure is identified when $x_t$ is a diffusion process or, more generally, a continuous-path Markov process.

Suggested Citation

  • Mark Davis, 1997. "A note on the forward measure," Finance and Stochastics, Springer, vol. 2(1), pages 19-28.
  • Handle: RePEc:spr:finsto:v:2:y:1997:i:1:p:19-28
    Note: received: October 1996; final version received: July 1997

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    More about this item


    Risk-neutral measure; Radon-Nikodym derivative; option pricing;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques


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