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On the martingale framework for futures prices

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  • Pozdnyakov, Vladimir
  • Steele, J. Michael

Abstract

We provide a framework for the martingale representation for futures prices which has some concrete advantages over the classical treatments of Duffie (Dynamic Asset Pricing Theory, 3rd Edition, Princeton University Press, Princeton, NJ, 2001) or Karatzas and Shreve (Brownian Motion and Stochastic Calculus, 2nd Edition, Springer, New York, 1997). In particular, the new formulation accommodates models where the distribution of the associated risk-free rate has unbounded support. This relaxation is particularly useful in the theory of LIBOR futures.

Suggested Citation

  • Pozdnyakov, Vladimir & Steele, J. Michael, 2004. "On the martingale framework for futures prices," Stochastic Processes and their Applications, Elsevier, vol. 109(1), pages 69-77, January.
    • Handle: RePEc:eee:spapps:v:109:y:2004:i:1:p:69-77
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    References listed on IDEAS

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    1. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Vladimir Pozdnyakov & J. Michael Steele, 2009. "Convexity Bias in Eurodollar Futures Prices: A Dimension-Free HJM Criterion," Methodology and Computing in Applied Probability, Springer, vol. 11(4), pages 551-560, December.
    2. Dan Pirjol, 2016. "Eurodollar futures pricing in log-normal interest rate models in discrete time," Applied Mathematical Finance, Taylor & Francis Journals, vol. 23(6), pages 445-464, November.
    3. Cortazar, Gonzalo & Lopez, Matias & Naranjo, Lorenzo, 2017. "A multifactor stochastic volatility model of commodity prices," Energy Economics, Elsevier, vol. 67(C), pages 182-201.

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