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A Benchmark Framework for Integrated Risk Management

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Abstract

The paper describes a consistent, integrated framework for modeling and pricing in finance, insurance and other areas of risk management. The growth optimal portfolio is taken as a benchmark. In the resulting price system expected future benchmarked, nonnegative prices are not greater that the last observed benchmarked price. The resulting benchmark model does not permit the generation of wealth from zero initial capital or the systemtic outperformance of the benchmark. Benchmarked fair price processes are defined as best forecasts of their benchmarked future values. Risk neutral and actuarial pricing formulae are obtained as special cases. Certain arbitrage amounts can still be modeled in this framework.

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File URL: http://www.business.uts.edu.au/qfrc/research/research_papers/rp82.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 82.

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Date of creation: 01 Jun 2002
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Handle: RePEc:uts:rpaper:82

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Related research

Keywords: benchmarked model; growth optimal portfolio; fair pricing; actuarial pricing; benchmark arbitrage; arbitrage amount;

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Cited by:
  1. Jan Baldeaux & Eckhard Platen, 2013. "Credit Derivative Evaluation and CVA under the Benchmark Approach," Research Paper Series 324, Quantitative Finance Research Centre, University of Technology, Sydney.

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