Girsanov Theorem

The Girsanov Theorem describes how the dynamics of stochastic processes change when the original measure is changed to an equivalent probability measure.

This theorem is particularly important in Financial Mathematics as it tells how to convert from the physical measure which describes the probability that an underlying asset will take a particular value to the risk-neutral measure which is a very useful tool for pricing derivatives on the underlying. 

In finance, Girsanov theorem is used each time one needs to derive an asset's dynamics under a new probability measure.

 

  Girsanov theorem

 

 

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