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1520 3
2013-08-08
which measure is most relevant for credit derivative pricing, risk-neutral or physical? and why?



I think the physical measure is more relevant, since hedging is difficult or not perfect even theoretically.
Any discussion is welcome.
Thank you in advance.
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2013-8-8 09:42:39
If just pricing, risk-neutral and forward measure.

For risk management, physical measure.

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2013-8-8 09:52:18
Chemist_MZ 发表于 2013-8-8 09:42
If just pricing, risk-neutral and forward measure.

For risk management, physical measure.
can you elaborate on your rationale?

your comments are too general, I guess.

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2013-8-8 09:58:24
shelf317 发表于 2013-8-8 09:52
can you elaborate on your rationale?

your comments are too general, I guess.
OK, I think it's nothing new, but a general principle.

for pricing, you have to be in the risk neutral world, otherwise, you can not satisfy the no-arbitrage condition. ( and forward measure is a similar stuff)

for risk management, you should be in the physical measure, otherwise you under or over estimate the probability if you put it under the risk neutral measure.
So we can't say which measure is more important. They just have different roles.

best,


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