Use induction to establish that drifts, 1, . . . ,n, must satisfy (17.103) under the no-arbitrage

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Use induction to establish that drifts, μ1, . . . ,μn, must satisfy (17.103) under the no-arbitrage assumption. Show that Dn+1(t) is a martingale if and only if Ln(t)Dn+1(t) is a martingale and then apply Itô's lemma to obtain (17.103).

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An Introduction to the Mathematics of Financial Derivatives

ISBN: 978-0123846822

3rd edition

Authors: Ali Hirsa, Salih N. Neftci

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Question Posted: Apr 29, 2016 03:45 PM

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Use induction to establish that drifts, 1, . . . ,n, must satisfy (17.103) under the no-arbitrage

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By definition of Equivalent Martingale Measure D n t is a marting...View the full answer

An Introduction to the Mathematics of Financial Derivatives

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