Regression modelValuation Theory
Risk-Neutral Valuation
Risk-neutral valuation (1979) is the fundamental principle that derivative prices equal the expected payoff discounted at the risk-free rate, computed under a risk-neutral probability measure (Q-measure). This principle, formalized by Harrison and Kreps, eliminates the need to estimate risk premia and is the foundation of modern derivatives pricing.
Apply with EconMindSoonVideoSoon
Read the full method
Members only
Sign inSign in with a free account to read this section.
Sources
- Harrison, J. M., & Kreps, D. M. (1979). Martingales and arbitrage in multiperiod securities markets. Journal of Economic Theory, 20(3), 381-408. DOI: 10.1016/0022-0531(79)90043-7 ↗
- Breeden, D. T., & Litzenberger, R. H. (1978). Prices of state-contingent claims implicit in option prices. Journal of Business, 51(4), 621-651. DOI: 10.1086/296025 ↗