Actuarial risk measures for financial derivative pricing

Marc Goovaerts and Roger Laeven

Insurance: Mathematics and Economics, 2008, vol. 42, issue 2, 540-547

Abstract: We present an axiomatic characterization of price measures that are superadditive and comonotonic additive for normally distributed random variables. The price representation derived involves a probability measure transform that is closely related to the Esscher transform, and we call it the Esscher-Girsanov transform. In a financial market in which the primary asset price is represented by a stochastic differential equation with respect to Brownian motion, the price mechanism based on the Esscher-Girsanov transform can generate approximate-arbitrage-free financial derivative prices.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:42:y:2008:i:2:p:540-547

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