Time-Consistent and Market-Consistent Evaluations
CentER Working Paper Series No. 2014-002
41 Pages Posted: 2 Jun 2011 Last revised: 7 Jan 2014
There are 3 versions of this paper
Time-Consistent and Market-Consistent Evaluations
Time-Consistent and Market-Consistent Evaluations
Time-Consistent and Market-Consistent Evaluations
Date Written: January 7, 2014
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 continuous stock prices 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.
Keywords: Actuarial valuation principles, financial risk, market-consistency, time-consistency
JEL Classification: G10, G11, G12, G13
Suggested Citation: Suggested Citation