medium · Quantitative Finance stochastic
In the Black-Scholes framework, what is the 'Market Price of Risk' θ, and how does it appear in Girsanov's Theorem?
- θ = (μ - r)/(σ); it is the drift shift required to reach the risk-neutral measure.
- Θ is defined as the implied volatility of the Radon-Nikodym derivative used in the measure change.
- Θ = r - μ, the discount rate applied when valuing payoffs directly under the physical probability measure.
- Θ = μ σ, representing the total risk premium of the position, expressed in dollar terms per share of the underlying.
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