Abstract.
We outline a martingale duality method for determining the minimal entropy martingale measure in a general continuous semimartingale model, and provide the relevant verification results. This method is illustrated by a detailed case study of the Stein and Stein stochastic volatility model driven by two correlated Brownian motions. It turns out that in case the mean reversion level and the correlation coefficient are nonzero, an investor who can use trading strategies adapted to the Brownian filtration may achieve a higher expected exponential utility from terminal wealth than an investor who can only observe the price process.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Author information
Authors and Affiliations
Corresponding author
Additional information
JEL Classification:
G13
Mathematics Subject Classification (2000):
60G44, 60H05, 54C70
I would like to thank David Hobson and Martin Schweizer for inspiring discussions.
This research is partially sponsored by Credit Suisse Group. Support by NCCR Financial Valuation and Risk Management is gratefully acknowledged.
Manuscript Received: January 2003; final version received: October 2004
Rights and permissions
About this article
Cite this article
Rheinländer, T. An entropy approach to the Stein and Stein model with correlation. Finance Stochast. 9, 399–413 (2005). https://doi.org/10.1007/s00780-004-0149-0
Issue Date:
DOI: https://doi.org/10.1007/s00780-004-0149-0