**Walter Schachermayer**

#

## Martingale Measures for discrete-time processes with infinite horizon.

**W. Schachermayer**

Mathematical Finance, Vol. 4 (1994), No. 1, pp. 25-55.

### Abstract:

Let $(S_t)_{t \in I}$ be an $\R^d$--valued adapted stochastic
process on $(\Om,\Cal F,(\Cal F_t)_{t \in I},P)$.
A basic problem, occuring notably in the analysis
of securities markets, is to decide whether there is a probability
measure $Q$ on $\Cal F$ equivalent to $P$ such that $(S_t)_{t \in I}$ is a
martingale with respect to $Q$.

It is known since the fundamental papers of Harrison--Kreps (79),
Harrison--Pliska (81) and Kreps (81) that there is an intimate relation
of this problem with the notions of "no arbitrage" and "no free
lunch" in financial economics.

We introduce the intermediate concept of "no free lunch with bounded
risk". This is a somewhat more precise version of the notion of
"no free lunch": It requires that there should be an absolute bound of
the maximal loss occuring in the trading strategies considered in the
definition of "no free lunch". We shall give an argument why the condition of "no
free lunch with bounded risk" should be satisfied by a reasonable
model of the price process $(S_t)_{t \in I}$ of a securities market.

We can establish the equivalence of the condition of "no free lunch with bounded risk"
with the existence of an equivalent martingale measure in the case
when the index set $I$ is discrete but (possibly) infinite. A similar
theorem was recently obtained by Delbaen (92) for the case of
continuous time processes with continuous paths. We can combine these
two theorems to get a similar result for the continuous time case
when the process $(S_t)_{t \in \R_+}$ is bounded and -- roughly speaking --
the jumps occur at predictable times.

### Preprints:

[PostScript (382 k)] [PS.gz (139 k)] [PDF (402 k)] [DOI: 10.1111/j.1467-9965.1994.tb00048.x]

Publications marked with have appeared in refereed journals.

Last modification of static code:
2016-11-18

Last modification of list of publications:
2018-02-07

*(webadmin)*