A benchmark model for financial markets
AbstractThis 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 and portfolios is derived. Furthermore, the short rate is obtained 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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Bibliographic InfoPaper provided by Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes in its series SFB 373 Discussion Papers with number 2001,52.
Date of creation: 2001
Date of revision:
financial market model; contingent claim pricing; benchmark model; growth optimal portfolio; arbitrage amount;
Other versions of this item:
- 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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- Platen, Eckhard, 2000.
"A minimal financial market model,"
SFB 373 Discussion Papers
2000,91, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
- 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.
- 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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