Pricing contingent claims on stocks diven by Lévy processes

Terence Chan

Research output: Contribution to journalArticlepeer-review

181 Citations (Scopus)


We consider the problem of pricing contingent claims on a stock whose price process is modelled by a geometric Lévy process, in exact analogy with the ubiquitous geometric Brownian motion model. Because the noise process has jumps of random sizes, such a market is incomplete and there is not a unique equivalent martingale measure. We study several approaches to pricing options which all make use of an equivalent martingale measure that is in different respects "closest" to the underlying canonical measure, the main ones being the Föllmer-Schweizer minimal measure and the martingale measure which has minimum relative entropy with respect to the canonical measure. It is shown that the minimum relative entropy measure is that constructed via the Esscher transform, while the Föllmer-Schweizer measure corresponds to another natural analogue of the classical Black-Scholes measure.

Original languageEnglish
Pages (from-to)504-528
Number of pages25
JournalAnnals of Applied Probability
Issue number2
Publication statusPublished - May 1999


  • Equivalent martingale measures
  • Incomplete market
  • Option pricing


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