Stochastic Upper Bounds for Present Value Functions

16 Pages Posted: 24 Feb 2006

See all articles by Marc Goovaerts

Marc Goovaerts

Catholic University of Leuven (KUL) - Department of Economics

Jan Dhaene

Katholieke Universiteit Leuven

Ann De Schepper

University of Antwerp - Faculty of Applied Economics

Abstract

In most practical cases, it is impossible to find an explicit expression for the distribution function of the present value of a sequence of cash flows that are discounted using a stochastic return process.In this paper, we present an easy computable approximation for this distribution function. The approximation is a distribution function which is, in the sense of convex order, an upper bound for the original distribution function. Explicit examples are given for pricing stochastic annuities with stochastic return process, more general stochastic cash flows as well as pricing Asian options. Numerical results seem to indicate that the approximation will often be rather close to the original distribution function.

Suggested Citation

Goovaerts, Marc and Dhaene, Jan and De Schepper, Ann, Stochastic Upper Bounds for Present Value Functions. Journal of Risk and Insurance, Vol. 67, No. 1, pp. 1-14, 2000 , Available at SSRN: https://ssrn.com/abstract=884446

Marc Goovaerts (Contact Author)

Catholic University of Leuven (KUL) - Department of Economics ( email )

Leuven, B-3000
Belgium
+32 0 16 32 7446 (Phone)
+32 0 16 32 3740 (Fax)

Jan Dhaene

Katholieke Universiteit Leuven ( email )

Naamsestraat 69
Leuven, 3000
Belgium

Ann De Schepper

University of Antwerp - Faculty of Applied Economics ( email )

Prinsstraat 13
Antwerp, B-2000
Belgium

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