non-tradable asset modeling by martingale methods

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non-tradable asset modeling by martingale methods

Postby ram1234 » Thu Mar 07, 2013 10:56 am

Dear all , Just few days ago I came across a strange statement somewhere that not all non-tradable assets can be modeled in the martingale methods of pricing(This was related to convexity adjustments for interest rate futures).But in caplet pricing we do model LIBOR as a martingale in forward measure.Can someone explain or give any links to any books or papers for the following fact : how to say which assets can not be modeled by martingale methods.Am I missing any tricks to understand?

thanks!
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Re: non-tradable asset modeling by martingale methods

Postby mj » Thu Mar 07, 2013 10:39 pm

generally, we can model rates since these are ratios of tradable assets. But general quantities really have no constraints.
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