Actuarial Risk Measures for Financial Derivative Pricing

15 Pages Posted: 5 Mar 2006

See all articles by Marc Goovaerts

Marc Goovaerts

Catholic University of Leuven (KUL) - Department of Economics

Roger J. A. Laeven

University of Amsterdam - Department of Quantitative Economics (KE)

Date Written: June 19, 2006

Abstract

We present an axiomatic characterization of price measures that are superadditive and comonotonic additive for normally distributed random variables. The price representation derived involves a probability measure transform that is closely related to the Esscher transform, and we call it the Esscher-Girsanov transform. In a financial market in which the primary asset price is represented by a stochastic differential equation with respect to Brownian motion, the price mechanism based on the Esscher-Girsanov transform can generate approximate-arbitrage-free financial derivative prices.

Keywords: Derivative pricing, Stochastic ordering, Esscher transform, Girsanov's Theorem, Comonotonicity, Equivalent martingale measure, Feynman-Kac integration

JEL Classification: D81, G12, G13

Suggested Citation

Goovaerts, Marc and Laeven, Roger Jean Auguste, Actuarial Risk Measures for Financial Derivative Pricing (June 19, 2006). Available at SSRN: https://ssrn.com/abstract=887466 or http://dx.doi.org/10.2139/ssrn.887466

Marc Goovaerts

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)

Roger Jean Auguste Laeven (Contact Author)

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

Valckenierstraat 65-67
Amsterdam, 1018 XE
Netherlands
+31 20 525 4252 (Phone)

HOME PAGE: http://www.rogerlaeven.com

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