Time-Consistent and Market-Consistent Evaluations (Revised version of CentER DP 2011-063)

A. Pelsser, M.A. Stadje

Research output: Working paperDiscussion paperOther research output

Abstract

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.
Original languageEnglish
Place of PublicationTilburg
PublisherEconometrics
Number of pages41
Volume2012-086
Publication statusPublished - 2012

Publication series

NameCentER Discussion Paper
Volume2012-086

Keywords

  • Actuarial valuation principles
  • financial risk
  • market-consistency
  • time-consistency

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