A note on the mean correcting martingale measure for geometric Lévy processes

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Abstract

A martingale measure is constructed by using a mean correcting transform for the geometric Lévy processes model. It is shown that this measure is the mean correcting martingale measure if and only if, in the Lévy process, there exists a continuous Gaussian part. Although this measure cannot be equivalent to a physical probability for a pure jump Lévy process, we show that a European call option price under this measure is still arbitrage free.

Keywords

European call option
Equivalent martingale measure
Lévy process
Mean correcting martingale measure

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This work was supported by the NNSF (10871064) of China.