A pseudo-analytic generalization of the memoryless property for continuous random variables and its use in pricing contingent claims.

Abstract

We explore an extension of the memoryless property for continuous random variables by using the concept of pseudo-sum. Subsequently, we demonstrate the practicality of this approach through two financial applications in which pseudo-sums characterize the values of arbitrage-free contingent claims. Moreover, we are able to establish new interesting connections between different probability distributions.