A Change of Measure Formula for Recursive Conditional Expectations

25 Pages Posted: 18 Nov 2021 Last revised: 14 Jul 2022

See all articles by Luca di Persio

Luca di Persio

University of Verona - Department of Computer Science

Alessandro Gnoatto

University of Verona - Department of Economics

Marco Patacca

University of Verona - Department of Economics

Date Written: July 12, 2022

Abstract

In this paper, we derive a representation for the value process associated to the solutions of FBSDEs in a jump-diffusion setting under multiple probability measures. Motivated by concrete financial problems, the latter representations are then applied to devise a generalization of the change of numéraire technique allowing to obtain recursive pricing formulas in the presence of multiple interest rates and collateralization.

Keywords: Change of measure, change of numéraire, BSDE, recursive conditional expectation, non-linear pricing

JEL Classification: C63, G12, G13

Suggested Citation

di Persio, Luca and Gnoatto, Alessandro and Patacca, Marco, A Change of Measure Formula for Recursive Conditional Expectations (July 12, 2022). Available at SSRN: https://ssrn.com/abstract=3964625 or http://dx.doi.org/10.2139/ssrn.3964625

Luca Di Persio

University of Verona - Department of Computer Science ( email )

Strada le Grazie, 15
Verona, 37134
Italy

Alessandro Gnoatto (Contact Author)

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

Marco Patacca

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

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