A Discrete Time Benchmark Approach for Finance and Insurance
This 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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