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A Benchmark Model for Financial Markets

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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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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Web page: http://www.qfrc.uts.edu.au/

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  1. 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.
  2. 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.
  3. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
  4. Buhlmann, H., 1992. "Stochastic discounting," Insurance: Mathematics and Economics, Elsevier, vol. 11(2), pages 113-127, August.
  5. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  6. 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.
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