A class of complete benchmark models with intensity-based jumps

Eckhard Platen ()

Published Paper Series from Finance Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: This paper proposes a class of complete financial market models, the benchmark models, with security price processes that exhibit intensity-based jumps. The benchmark or reference unit is chosen to be the growth-optimal portfolio. Primary security account prices, when expressed in units of the benchmark, turn out to be local martingales. In the proposed framework an equivalent risk-neutral measure need not exist. Benchmarked fair derivative prices are obtained as conditional expectations of future benchmarked prices under the real-world probability measure. This concept of fair pricing generalizes the classical risk-neutral approach and the actuarial present-value pricing methodology.

Keywords: Benchmark model; jump diffusions; growth-optimal portfolio; event risk premium; fair pricing; actuarial pricing; insurance (search for similar items in EconPapers)
Pages: 16 pages
Date: 2004-01-01
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Citations: View citations in EconPapers (8)

Published as: Platen, E., 2004, "A class of complete benchmark models with intensity-based jumps", Journal Of Applied Probability, 41(1), 19-34.

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