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Martingales and Portfolio Decisions: A User's Guide

Zimmermann, Heinz

In: Financial Markets and Portfolio Management, 2006, vol. 20, no. 1, p. 75-101

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    Title
    • Martingales and Portfolio Decisions: A User's Guide
    Author
    • Zimmermann, Heinz. Abteilung Finanzmarkttheorie/Department of Finance, WWZ - Universität Basel, Holbeinstrasse 12, 4051, Basel, Switzerland
    Document Type
    • Postprint
    Language
    • English
    Published in
    • Financial Markets and Portfolio Management, 2006, vol. 20, no. 1, p. 75-101. Springer US; http://www.springer-ny.com
    Other Version
    OAI-PMH Identifier
    • oai:doc.rero.ch:310066
    Summary
    This article gives an overview and introduction to the Martingale approach to multi-period (dynamic) portfolio decisions. While Martingale pricing techniques have long been used with considerable success in the pricing of derivatives and financial assets in general, their potential to improve the practice of dynamic portfolio decisions is not sufficiently recognized yet. This article shows that the approach is, in principle, not difficult to implement for readers equipped with standard option replication techniques if markets are sufficiently "complete” in order to provide investors with the relevant information about the pricing of financial risks. The article provides a practical guide to implement the basic features of the approach in a binomial framework