Equivalent Martingale Measures


DEFINITION of 'Equivalent Martingale Measures'

In asset pricing, a probability distribution of expected payouts from an investment which is adjusted for the risk premiums of investors as a whole. An equivalent martingale measure thus factors in the average investor's degree of risk aversion to allow for a more straightforward calculation of the present value of a security.

Also known as Risk Neutral Measures.

BREAKING DOWN 'Equivalent Martingale Measures'

In an efficient market, this present value calculation should be equal to the price at which the security is currently trading. Equivalent martingale measures are most commonly used in the pricing of derivative securities, because this is the most common case of a security type which has several discrete, contingent payouts.

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