A Change of Measure Formula for Recursive Conditional Expectations
25 Pages Posted: 18 Nov 2021 Last revised: 14 Jul 2022
Date Written: July 12, 2022
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
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