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Applied Multidimensional Girsanov Theorem

18 Pages Posted: 11 Apr 2011 Last revised: 3 Mar 2015

Denis Papaioannou

Quant Advisory Ltd

Date Written: July 14, 2012

Abstract

The present article is meant as a bridge between theory and practice concerning Girsanov theorem. In the first part we give theoretical results leading to a straightforward three step process allowing to express an asset's dynamics in a new probability measure. In the following sections we apply this three step process. The first application consists in expressing a foreign asset's dynamics in domestic currency which leads to the well known quanto adjustment formula. The second application is the expression of the forwards' dynamics under Libor Market Model using a unique probability measure. The final application consists in expressing foreign short rate Hull & White dynamics under domestic measure.

Keywords: Girsanov, Multidimensional Girsanov, Quanto Adjustment, LMM Drift, Drift Calculation

JEL Classification: C00, G13

Suggested Citation

Papaioannou, Denis, Applied Multidimensional Girsanov Theorem (July 14, 2012). Available at SSRN: https://ssrn.com/abstract=1805984 or http://dx.doi.org/10.2139/ssrn.1805984

Denis Papaioannou (Contact Author)

Quant Advisory Ltd ( email )

London
United Kingdom

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