TIME‐CONSISTENT AND MARKET‐CONSISTENT EVALUATIONS |
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Authors: | Antoon Pelsser Mitja Stadje |
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Affiliation: | 1. Maastricht University & Netspar;2. Tilburg University, CentER & Netspar |
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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. |
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Keywords: | actuarial valuation principles financial risk market‐consistency time‐consistency |
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