Time-consistent and market-consistent evaluations
Pelsser,A. Stadje,M.A.
Pelsser,A.
Stadje,M.A.
Abstract
We consider evaluation methods for payoffs with an inherent financial risk as encountered for instance for portfolios held by pension funds and insurance companies. Pricing such payoffs in a way consistent to market prices typically involves combining actuarial techniques with methods from mathematical finance. We propose to extend standard actuarial principles by a new market-consistent evaluation procedure which we call “two-step market evaluation.” This procedure preserves the structure of standard evaluation techniques and has many other appealing properties. We give a complete axiomatic characterization for two-step market evaluations. We show further that in a dynamic setting with continuous stock prices every evaluation which is time-consistent and market-consistent is a two-step market evaluation. We also give characterization results and examples in terms of g-expectations in a Brownian-Poisson setting.
Description
Date
2014
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Journal ISSN
Volume Title
Publisher
Research Projects
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Journal Issue
Keywords
Actuarial valuation principles, financial risk, market-consistency, time-consistency
Citation
Pelsser, A & Stadje, M A 2014, 'Time-consistent and market-consistent evaluations', Mathematical Finance, vol. 24, no. 1, pp. 25-65. https://doi.org/10.1111/mafi.12026
License
info:eu-repo/semantics/restrictedAccess