Arbitrage-Free Pricing via Equivalent Martingale Measures

Students often confuse the physical measure

\mathbb{P}

with the risk-neutral measure

\mathbb{Q}

\mathbb{P}

describes actual market behavior, while

\mathbb{Q}

is a mathematical construction used solely for pricing;

\mathbb{Q}

-probabilities are not predictions of future market outcomes.

Institutional Reference: Advanced Stochastic Processes