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 marketconsistent 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.
|Place of Publication||Tilburg|
|Number of pages||41|
|Publication status||Published - 2012|
|Name||CentER Discussion Paper|
- Actuarial valuation principles
- financial risk