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Intrinsic Prices of Risk
2014
Social Science Research Network
We review the nature of some well-known phenomena such as volatility smiles, convexity adjustments and parallel derivative markets. We propose that the market is incomplete and postulate the existence of intrinsic risks in every contingent claim as a basis for understanding these phenomena. In a continuous time framework, we bring together the notion of intrinsic risk and the theory of change of measures to derive a probability measure, namely risk-subjective measure, for evaluating contingent
doi:10.2139/ssrn.2406501
fatcat:ilrfa6tvunbn7o5mmmzn6memme