medium · Quantitative Finance stochastic
According to Girsanov's Theorem, what is the effect of changing from the physical measure P to the risk-neutral measure Q on the dynamics of an asset?
- It converts the geometric Brownian motion into an arithmetic Brownian motion.
- It rescales the volatility to account for the market price of risk.
- It ensures that the asset price becomes a martingale without discounting.
- It shifts the drift of the Brownian motion but leaves the volatility unchanged.
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