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Quantitative Finance · Glossary

What is Equivalent martingale measure, risk-neutral measure?

Also known as: equivalent martingale measure · risk-neutral measure

Definition 5.4 Quantitative Methods · Chapter 5 — Girsanov and Changes of Numeraire

An equivalent martingale measure for a numeraire N\mathcal N is a probability QN\mathbb Q^{\mathcal N} equivalent to P\P under which Vt/NtV_t/\mathcal N_t is a martingale for the price VV of every traded asset. The risk-neutral measure Q\mathbb Q is the equivalent martingale measure for the money-market account.

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