Risk-Neutral Probabilities Explained

ArXiv ID: ssrn-1395390 “View on arXiv”

Authors: Unknown

Abstract

All too often, the concept of risk-neutral probabilities in mathematical finance is poorly explained, and misleading statements are made. The aim of this paper

Keywords: risk-neutral probabilities, martingales, stochastic calculus, derivatives pricing, Quantitative Finance

Complexity vs Empirical Score

• Math Complexity: 7.0/10
• Empirical Rigor: 2.0/10
• Quadrant: Lab Rats
• Why: The paper focuses on theoretical foundations, including continuous-time stochastic processes like geometric Brownian motion and martingales, but lacks any empirical backtesting, data, or implementation details.

  flowchart TD
    A["Research Goal: Explain Risk-Neutral Probabilities clearly"] --> B["Methodology: Critical Review of Stochastic Calculus"]
    B --> C["Input: Misleading Statements in Texts"]
    C --> D["Computational Process: Martingale Measure Derivation"]
    B --> E["Input: Derivatives Pricing Models"]
    E --> D
    D --> F["Key Finding: Q-Measure vs. P-Measure"]
    D --> G["Key Finding: No-Arbitrage Pricing Framework"]