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The Minimal Entropy Martingale Measure for Exponential Markov Chains

  • Young Lee (a1) and Thorsten Rheinländer (a2)

Abstract

In this article we investigate the minimal entropy martingale measure for continuous-time Markov chains. The conditions for absence of arbitrage and existence of the minimal entropy martingale measure are discussed. Under this measure, expressions for the transition intensities are obtained. Differential equations for the arbitrage-free price are derived.

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Copyright

Corresponding author

Postal address: Deutsche Bank AG, 1 Great Winchester Street, London EC2N 2DB, UK. Email address: young.lee@db.com
∗∗ Postal address: Financial and Actuarial Mathematics, Vienna University of Technology, Wiedner Hauptstraße 8/105-1, 1040 Vienna, Austria. Email address: rheinlan@fam.tuwien.ac.at

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The views expressed in this paper are those of the author and do not necessarily reflect the position of Deutsche Bank AG.

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References

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The Minimal Entropy Martingale Measure for Exponential Markov Chains

  • Young Lee (a1) and Thorsten Rheinländer (a2)

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