SFB 303 Discussion Paper No. B-194

Author: Schweizer, Martin
Title: Martingale Densities for General Asset Prices
Abstract: This paper discusses some properties of general asset prices in continuous time. We introduce the concept of a martingale density which is a generalization of an equivalent martingale measure, and we show that absence of arbitrage plus some technical conditions implies the existence of a martingale density. This is in turn already sufficient to derive a recent result of Back (1990) on local risk premia for asset returns. As an application, we obtain a simple condition, valid in arbitrary information structures, for the drift part of discounted security gains to be absolutely continuous with respect to the variance process of the martingale part.
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Creation-Date: August 1991
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