Girsanov, Radon Nikodym, Equivalent Measures, Numeraire

surfasaurus · September 10th, 2003, 3:27 pm

Anybody!Who knows a book or an article or any other publication with (detailed and not trivial!) expository examples of measure change use for derivatives valuatioin?Thank you!

Pat · September 10th, 2003, 11:32 pm

Surely Hull's book uses the level numeraire to price swaptions!

surfasaurus · September 11th, 2003, 9:09 am

Pat,You are absolutely right, that is correct that Hull's book provides examples, thank you!But that is not the mathematical level we are looking for.

dS · September 12th, 2003, 1:48 pm

Baxter & Rennie

Martingale · September 12th, 2003, 2:04 pm

I am sure Bjork's book has this treatment, as well as a paper by Geman. Cannot remember if Lamperton's book has it ( it was 4 years ago I read it, not sure about )

elan · September 12th, 2003, 2:06 pm

I think the original paper by Geman, El Karoui, and Rochet "Changes of Numeraire, Changes of Probability Measures, and Option Pricing", Journal of Applied Probability, 32, 443 - 458 (1995), is an excellent entry point to the methodology. It has a large number of examples of how the technique works, and the explanations are very clear and detailed.

surfasaurus · September 13th, 2003, 10:42 am

Elan, Martingale, thank you for your suggestions!