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A Benchmark Model for Financial Markets

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Abstract

This paper introduces a benchmark model for financial markets, which is based on the unique characterization of a benchmark portfolio that is chosen to be the growth optimal portfolio. The general structure of risk premia for asset prices as an average of appreciation rates. The benchmark model is shown to be locally arbitrage free, however, it still permits some form of arbitrage. Finally, a subclass of arbitrage free contingent claim prices is derived.

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File URL: http://www.business.uts.edu.au/qfrc/research/research_papers/rp59.pdf
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Bibliographic Info

Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 59.

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Date of creation: 01 Jun 2001
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Handle: RePEc:uts:rpaper:59

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Keywords: financial market model; benchmark model; growth optimal portfolio; contingent claim pricing; arbitrage amount;

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  1. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  2. Harrison, J. Michael & Pliska, Stanley R., 1981. "Martingales and stochastic integrals in the theory of continuous trading," Stochastic Processes and their Applications, Elsevier, vol. 11(3), pages 215-260, August.
  3. L. C. G. Rogers, 1997. "The Potential Approach to the Term Structure of Interest Rates and Foreign Exchange Rates," Mathematical Finance, Wiley Blackwell, vol. 7(2), pages 157-176.
  4. Buhlmann, H., 1992. "Stochastic discounting," Insurance: Mathematics and Economics, Elsevier, vol. 11(2), pages 113-127, August.
  5. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
  6. Eckhard Platen, 2001. "A Minimal Financial Market Model," Research Paper Series 48, Quantitative Finance Research Centre, University of Technology, Sydney.
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Cited by:
  1. David Heath & Eckhard Platen, 2001. "Perfect Hedging of Index Derivatives Under a Locally Arbitrage Free Minimal Market Model," Research Paper Series 61, Quantitative Finance Research Centre, University of Technology, Sydney.

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