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Intermediate Financial Theory, 3rd Edition by John B. Donaldson, Jean-Pierre Danthine

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Chapter 12

The Martingale Measure

Part I

Chapter 12 develops the notion of Martingale Pricing, also referred to as the technique of ‘risk-neutral valuation,’ in a general setting of finite dates and states. Risk-neutral valuation modifies the probabilities by which future expected cash flows are computed, in such a way that discounting at the risk-free rate of interest is legitimate.

Keywords

Risk-neutral valuation; cash flow; risk-free rate; Arrow–Debreu; payoff

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