Girsanov's Theorem

Senior Quant · Stochastic Calculus

Question

State Girsanov's theorem precisely, including the Novikov condition. Apply it to derive the risk-neutral dynamics of GBM from its physical-measure SDE

dS = \mu S\,dt + \sigma S\,dW^{\mathbb{P}}

. Where does

\mu

go?

←Itô's Lemma Applied to W²

3 / 10

Stopped Martingale→