A Discrete Time Benchmark Approach for Finance and Insurance
AbstractThis paper proposes an integrated appraoch to discrete time modelling in finance and insurance. This approach is based on the existence of a specific benchmark portfolio, known as the growth optimal portfolio. When used as numeraire, this portfolio ensures that all benchmarked price processes are super-martingales. A fair market is characterized in terms of the type of maximum that the optimal growth rate attains. In general, arbitrage amounts arise due to supermartingale property of benchmarked traded prices. No measure transformation is needed for the pricing of insurance policies and derivatives in a fair market.
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 74.
Date of creation: 01 Mar 2002
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financial and insurance market model; benchmark approach; growth optimal portfolio; numeraire portfolio; arbitrage amount; fair pricing; unit linked insurance;
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
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