Just a note about shreve's notes. The notes available from Chalsinis page (which seems to be the one most pointed to) are older than the ones from shreve's own page (www.math.cmu.edu/users/shreve). Chalsini-page give you a 348page document from 25th july 1997, shreve gives you a 365page document from October 6th 1997.I don't know what the differences are exactly, just noticed this (after having printed the older version ).

I'd liketo re-ignite the discussion that was taking place here (on Credit Derivatives).. it seems to have died!!Please see my earlier post below in this thread....But I was getting confused about why a default free bond should have a risk premium under the risk neutral measure?? Any help out there?Many ThanksSam

Sam, I was also waiting with bated breath for the answer, also to see the almost certain meat in the measure theory sandwich, or at least a reason why stochastic processes can't be put in a more intuitive lingo.

I am not certainly whether my argument is right or not.At the first time , when I read JohnHull's book ,I also have this problem. At last , I found many books covered thest article in the same way : when they have never talk about the zero coupon , they use free risk rate to model . When the zero coupon appears, they now use it to model. Especially when you use measures(you can find this part in JohnHull's book ,the fourth edition , chap 19.) the zero coupon can as a measure to get martingale.Why we should think about risk premium?If you ever transfer a stochstic PDE into martingale, or you can try it now, you will find it is apparent.ds/s=udt+sigma*dw1(t)--->let ds/s=rdt+sigma*dw2(t)that means the market price of risk =(u-r)/sigma.Or we can say the zero coupon doesn't mean free risk rate , it also have risk. So it needs risk premium.

I'd liketo re-ignite the discussion that was taking place here (on Credit Derivatives).. it seems to have died!!Please see my earlier post below in this thread....But I was getting confused about why a default free bond should have a risk premium under the risk neutral measure?? Any help out there?let's take X as a numerator, and suppose P as any asset price. d(P/X) has no drift under X-measure. If X is default free zero coupon bond, then X-measure is called risk neutral measure. If a stock price is chosen as X, then even default free zero coupon bond has risk-premium.Or I should have said that under actual world, default free zero coupon bond has a different drift from default free overnite rate, anyway.And the difference of those drift(real and default free overnite rate) divided by volatility is risk premium.So I guess the term "RISK premium" is confusing to you. But it's nothing but variable change/measure change.Monk

Monk ,you get it.