State Price Deflators and Stochastic Discounting

Mario V. Wüthrich and Michael Merz
Additional contact information
Mario V. Wüthrich: ETH Zurich
Michael Merz: University of Hamburg

Chapter Chapter 2 in Financial Modeling, Actuarial Valuation and Solvency in Insurance, 2013, pp 11-33 from Springer

Abstract: Abstract In this chapter we describe stochastic discounting and valuation of random cash flows in a multiperiod discrete time setting. We therefore start by introducing the term structure of interest rates notion. We briefly discuss the calibration of the actual risk-free interest rate curve using the Svensson and the Nelson–Siegel term structure families. The main purpose of this chapter is then to introduce a consistent multiperiod pricing framework. This consistent multiperiod pricing framework is either based on state price deflators or on equivalent martingale measures which, in particular, lead to a pricing framework free of arbitrage. We introduce these concepts and describe their connection using the market price of risk construction. In fact, we insist of understanding price processes under both concepts (and their connection) because calibration, prediction and pricing consider both frameworks simultaneously.

Keywords: Interest Rate; Cash Flow; Term Structure; Yield Curve; Price Process (search for similar items in EconPapers)
Date: 2013
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:sprfcp:978-3-642-31392-9_2

Ordering information: This item can be ordered from
http://www.springer.com/9783642313929

DOI: 10.1007/978-3-642-31392-9_2

Access Statistics for this chapter

More chapters in Springer Finance from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().