Singular initial market-price-of-risk obstruction
ID: singular-initial-market-price-of-risk-obstruction
A positive normalized continuous local martingale deflator requires a locally square-integrable Brownian diffusion coefficient. If the forced market price of risk is , the coefficient has magnitude . Since , continuity makes its squared integral diverge near zero. The bank account can nevertheless exist because itself is integrable; finite integrated interest is weaker than square-integrability of the required risk compensation.
New to topics? Read the docs here!