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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.

Suggested Citation

  • Eckhard Platen, 2002. "A Benchmark Framework for Integrated Risk Management," Research Paper Series 82, Quantitative Finance Research Centre, University of Technology, Sydney.
  • Handle: RePEc:uts:rpaper:82
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    File URL: http://www.qfrc.uts.edu.au/research/research_papers/rp82.pdf
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    Cited by:

    1. Renata Rendek, 2013. "Modeling Diversified Equity Indices," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 23.
    2. Jan Baldeaux & Eckhard Platen, 2015. "Credit Derivative Evaluation and CVA Under the Benchmark Approach," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 22(3), pages 305-331, September.

    More about this item

    Keywords

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

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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