Abstract: The martingale approach is widely used in the literature on contingent claim analysis. Following the definition of a martingale process, we give some examples, including the Wiener process, stochastic integral, and exponential martingale. We then present the Girsanov’s theorem on a change of measure. As an application, we derive the Black–Scholes formula under risk neutral measure. A brief discussion on the pricing kernel representation and the Feynman–Kac formula is also included.
Publication Year: 2015
Publication Date: 2015-01-01
Language: en
Type: book-chapter
Indexed In: ['crossref']
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