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1 results

  • Principles for modelling financial markets

  • Part of
  • Eckhard Platen, Rolando Rebolledo
  • Journal:
    Journal of Applied Probability / Volume 33 / Issue 3 / September 1996
    Published online by Cambridge University Press:
    14 July 2016, pp. 601-613
    Print publication:
    September 1996

  • The paper introduces an approach focused towards the modelling of dynamics of financial markets. It is based on the three principles of market clearing, exclusion of instantaneous arbitrage and minimization of increase of arbitrage information. The last principle is equivalent to the minimization of the difference between the risk neutral and the real world probability measures. The application of these principles allows us to identify various market parameters, e.g. the risk-free rate of return. The approach is demonstrated on a simple financial market model, for which the dynamics of a virtual risk-free rate of return can be explicitly computed.