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Buhlmann’s Economic Premium Principle in The Presence of Transaction Costs

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  • Masaaki Kijima

    ()
    (Graduate School of Social Sciences, Tokyo Metropolitan University)

  • Akihisa Tamura

    ()
    (Department of Mathematics, Keio University)

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    Abstract

    This paper examines the B¨uhlmann’s equilibrium pricing model (1980) in the presence of transaction cost and derives the (multivariate) Esscher transform within the framework under some assumptions. The result reveals that the Esscher transform is an appropriate probability transform for the pricing of insurance risks even in the market with transaction costs.

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    File URL: http://www.kier.kyoto-u.ac.jp/DP/DP893.pdf
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    Bibliographic Info

    Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 893.

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    Date of creation: Mar 2014
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    Handle: RePEc:kyo:wpaper:893

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    Keywords: Equilibrium pricing; Equilibrium allocation; Incomplete market; Esscher transform; Transaction cost;

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    1. Chiaki Hara, 2013. "Asset Prices, Trading Volumes, and Investor Welfare in Markets with Transaction Costs," KIER Working Papers 862, Kyoto University, Institute of Economic Research.
    2. Knut K. Aase, 2002. "Equilibrium Pricing in the Presence of Cumulative Dividends Following a Diffusion," Mathematical Finance, Wiley Blackwell, vol. 12(3), pages 173-198.
    3. Kijima, Masaaki & Muromachi, Yukio, 2008. "An extension of the Wang transform derived from Bühlmann's economic premium principle for insurance risk," Insurance: Mathematics and Economics, Elsevier, vol. 42(3), pages 887-896, June.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
    5. He, Lin & Liang, Zongxia, 2009. "Optimal financing and dividend control of the insurance company with fixed and proportional transaction costs," Insurance: Mathematics and Economics, Elsevier, vol. 44(1), pages 88-94, February.
    6. Hojgaard, Bjarne & Taksar, Michael, 1998. "Optimal proportional reinsurance policies for diffusion models with transaction costs," Insurance: Mathematics and Economics, Elsevier, vol. 22(1), pages 41-51, May.
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