Time-Consistent and Market-Consistent Evaluations

Mitja Stadje () and Antoon Pelsser

Papers from arXiv.org

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 a continuous stock prices process 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.

Date: 2011-09, Revised 2013-12
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Citations: View citations in EconPapers (15)

Published in Mathematical Finance, Vol. 24, No. 1 (January 2014), 25-65

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Journal Article: TIME-CONSISTENT AND MARKET-CONSISTENT EVALUATIONS (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1109.1749

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