Time-Consistent and Market-Consistent Evaluations
Maastricht University; Netspar
Tilburg University - Department of Econometrics & Operations Research
May 25, 2011
We consider evaluation methods for payoffs with an inherentfinancial 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.
Number of Pages in PDF File: 40
Keywords: Actuarial valuation principles, financial risk, time consistency, market consistency
JEL Classification: D81, G12, G22, G23working papers series
Date posted: May 7, 2011 ; Last revised: October 26, 2012
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