Time-Consistent and Market-Consistent Evaluations (Revised version of 2012-086)

M.A. Stadje, A. Pelsser

Research output: Working paperDiscussion paperOther research output

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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 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.
Original languageEnglish
Place of PublicationTilburg
PublisherEconometrics
Number of pages41
Volume2014-002
Publication statusPublished - 2014

Publication series

NameCentER Discussion Paper
Volume2014-002

Fingerprint

Evaluation
Evaluation method
Axiomatic characterization
Stock prices
Pension funds
Mathematical finance
New markets
Market price
Insurance companies
Pricing
Financial risk

Keywords

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

Cite this

Stadje, M. A., & Pelsser, A. (2014). Time-Consistent and Market-Consistent Evaluations (Revised version of 2012-086). (CentER Discussion Paper; Vol. 2014-002). Tilburg: Econometrics.
Stadje, M.A. ; Pelsser, A. / Time-Consistent and Market-Consistent Evaluations (Revised version of 2012-086). Tilburg : Econometrics, 2014. (CentER Discussion Paper).
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Stadje, MA & Pelsser, A 2014 'Time-Consistent and Market-Consistent Evaluations (Revised version of 2012-086)' CentER Discussion Paper, vol. 2014-002, Econometrics, Tilburg.

Time-Consistent and Market-Consistent Evaluations (Revised version of 2012-086). / Stadje, M.A.; Pelsser, A.

Tilburg : Econometrics, 2014. (CentER Discussion Paper; Vol. 2014-002).

Research output: Working paperDiscussion paperOther research output

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N2 - 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.

AB - 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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Stadje MA, Pelsser A. Time-Consistent and Market-Consistent Evaluations (Revised version of 2012-086). Tilburg: Econometrics. 2014. (CentER Discussion Paper).