Re: Risk Neutral vs Real World

From: Dan
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Date: 10 Aug 2005
Time: 15:23:15

Comments

What are the differences between a scenario generated using a risk-neutral assumptoin compared to one generated using a real world assumption? I've read this article, along with many others on the subject. There are many difference between the valuation process in a risk-neutral world versus the real world, but I have not been able to figure out the differences in the generators of the scenerios used in the two. The only thing I've really found is that log normal doesn't work for real world because of its ever increasing volatility (as mentioned in my last post). I understand the different assumptions that go into each model, but just not how that changes the stochastic simulation. Thanks.