Market-Consistent Prices
Market-Consistent Prices

Author: Pablo Koch-Medina

Publisher: Springer Nature

Published: 2020-07-16

Total Pages: 448

ISBN-13: 3030397246

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Arbitrage Theory provides the foundation for the pricing of financial derivatives and has become indispensable in both financial theory and financial practice. This textbook offers a rigorous and comprehensive introduction to the mathematics of arbitrage pricing in a discrete-time, finite-state economy in which a finite number of securities are traded. In a first step, various versions of the Fundamental Theorem of Asset Pricing, i.e., characterizations of when a market does not admit arbitrage opportunities, are proved. The book then focuses on incomplete markets where the main concern is to obtain a precise description of the set of “market-consistent” prices for nontraded financial contracts, i.e. the set of prices at which such contracts could be transacted between rational agents. Both European-type and American-type contracts are considered. A distinguishing feature of this book is its emphasis on market-consistent prices and a systematic description of pricing rules, also at intermediate dates. The benefits of this approach are most evident in the treatment of American options, which is novel in terms of both the presentation and the scope, while also presenting new results. The focus on discrete-time, finite-state models makes it possible to cover all relevant topics while requiring only a moderate mathematical background on the part of the reader. The book will appeal to mathematical finance and financial economics students seeking an elementary but rigorous introduction to the subject; mathematics and physics students looking for an opportunity to get acquainted with a modern applied topic; and mathematicians, physicists and quantitatively inclined economists working or planning to work in the financial industry.

Market-Consistent Actuarial Valuation
Market-Consistent Actuarial Valuation

Author: Mario V. Wüthrich

Publisher: Springer Science & Business Media

Published: 2010-09-02

Total Pages: 164

ISBN-13: 3642148522

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It is a challenging task to read the balance sheet of an insurance company. This derives from the fact that different positions are often measured by different yardsticks. Assets, for example, are mostly valued at market prices whereas liabilities are often measured by established actuarial methods. However, there is a general agreement that the balance sheet of an insurance company should be measured in a consistent way. Market-Consistent Actuarial Valuation presents powerful methods to measure liabilities and assets in a consistent way. The mathematical framework that leads to market-consistent values for insurance liabilities is explained in detail by the authors. Topics covered are stochastic discounting with deflators, valuation portfolio in life and non-life insurance, probability distortions, asset and liability management, financial risks, insurance technical risks, and solvency.

Market Consistency
Market Consistency

Author: Malcolm Kemp

Publisher: John Wiley & Sons

Published: 2009-09-10

Total Pages: 647

ISBN-13: 0470684895

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Achieving market consistency can be challenging, even for the most established finance practitioners. In Market Consistency: Model Calibration in Imperfect Markets, leading expert Malcolm Kemp shows readers how they can best incorporate market consistency across all disciplines. Building on the author's experience as a practitioner, writer and speaker on the topic, the book explores how risk management and related disciplines might develop as fair valuation principles become more entrenched in finance and regulatory practice. This is the only text that clearly illustrates how to calibrate risk, pricing and portfolio construction models to a market consistent level, carefully explaining in a logical sequence when and how market consistency should be used, what it means for different financial disciplines and how it can be achieved for both liquid and illiquid positions. It explains why market consistency is intrinsically difficult to achieve with certainty in some types of activities, including computation of hedging parameters, and provides solutions to even the most complex problems. The book also shows how to best mark-to-market illiquid assets and liabilities and to incorporate these valuations into solvency and other types of financial analysis; it indicates how to define and identify risk-free interest rates, even when the creditworthiness of governments is no longer undoubted; and it explores when practitioners should focus most on market consistency and when their clients or employers might have less desire for such an emphasis. Finally, the book analyses the intrinsic role of regulation and risk management within different parts of the financial services industry, identifying how and why market consistency is key to these topics, and highlights why ideal regulatory solvency approaches for long term investors like insurers and pension funds may not be the same as for other financial market participants such as banks and asset managers.

Market Consistent and Sub-Consistent Valuations in Incomplete Markets
Market Consistent and Sub-Consistent Valuations in Incomplete Markets

Author: Hirbod Assa

Publisher:

Published: 2015

Total Pages: 41

ISBN-13:

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From January 2016, all insurance companies that are regulated within Solvency II framework will have to value their asset and liabilities using a market-consistent method. This paper studies market-consistent and sub-consistent valuations in incomplete financial markets with two types (type I and II) of market consistency. While market consistency of type I holds under fairly weak assumptions, the type II consistency, which is the usual definition of market consistency in the literature, holds only if the market prices are linear for fully hedged assets. We also characterize the market consistent and sub-consistent evaluators in several different ways. We discuss how market-consistent and sub-consistent valuations can be regarded as a robust approach to hedging and pricing in the presence of market imperfections such as market incompleteness and frictions.

Market Consistent Pricing of Insurance Products
Market Consistent Pricing of Insurance Products

Author: Semyon Malamud

Publisher:

Published: 2007

Total Pages: 32

ISBN-13:

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We present the first step in a program to develop a comprehensive, unified equilibrium theory of asset and liability pricing. We give a mathematical framework for pricing insurance products in a multiperiod financial market. This framework reflects classical economic principles (like utility maximization) and generates pricing algorithms for non-hedgeable insurance risks.

Innovations in Quantitative Risk Management
Innovations in Quantitative Risk Management

Author: Kathrin Glau

Publisher: Springer

Published: 2015-01-09

Total Pages: 434

ISBN-13: 331909114X

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Quantitative models are omnipresent –but often controversially discussed– in todays risk management practice. New regulations, innovative financial products, and advances in valuation techniques provide a continuous flow of challenging problems for financial engineers and risk managers alike. Designing a sound stochastic model requires finding a careful balance between parsimonious model assumptions, mathematical viability, and interpretability of the output. Moreover, data requirements and the end-user training are to be considered as well. The KPMG Center of Excellence in Risk Management conference Risk Management Reloaded and this proceedings volume contribute to bridging the gap between academia –providing methodological advances– and practice –having a firm understanding of the economic conditions in which a given model is used. Discussed fields of application range from asset management, credit risk, and energy to risk management issues in insurance. Methodologically, dependence modeling, multiple-curve interest rate-models, and model risk are addressed. Finally, regulatory developments and possible limits of mathematical modeling are discussed.

Market-Consistent Actuarial Valuation
Market-Consistent Actuarial Valuation

Author: Mario V. Wüthrich

Publisher: Springer

Published: 2016-10-22

Total Pages: 145

ISBN-13: 3319466364

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This is the third edition of this well-received textbook, presenting powerful methods for measuring insurance liabilities and assets in a consistent way, with detailed mathematical frameworks that lead to market-consistent values for liabilities. Topics covered are stochastic discounting with deflators, valuation portfolio in life and non-life insurance, probability distortions, asset and liability management, financial risks, insurance technical risks, and solvency. Including updates on recent developments and regulatory changes under Solvency II, this new edition of Market-Consistent Actuarial Valuation also elaborates on different risk measures, providing a revised definition of solvency based on industry practice, and presents an adapted valuation framework which takes a dynamic view of non-life insurance reserving risk.

Inefficient Markets
Inefficient Markets

Author: Andrei Shleifer

Publisher: OUP Oxford

Published: 2000-03-09

Total Pages: 225

ISBN-13: 0191606898

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The efficient markets hypothesis has been the central proposition in finance for nearly thirty years. It states that securities prices in financial markets must equal fundamental values, either because all investors are rational or because arbitrage eliminates pricing anomalies. This book describes an alternative approach to the study of financial markets: behavioral finance. This approach starts with an observation that the assumptions of investor rationality and perfect arbitrage are overwhelmingly contradicted by both psychological and institutional evidence. In actual financial markets, less than fully rational investors trade against arbitrageurs whose resources are limited by risk aversion, short horizons, and agency problems. The book presents and empirically evaluates models of such inefficient markets. Behavioral finance models both explain the available financial data better than does the efficient markets hypothesis and generate new empirical predictions. These models can account for such anomalies as the superior performance of value stocks, the closed end fund puzzle, the high returns on stocks included in market indices, the persistence of stock price bubbles, and even the collapse of several well-known hedge funds in 1998. By summarizing and expanding the research in behavioral finance, the book builds a new theoretical and empirical foundation for the economic analysis of real-world markets.

Implicit Embedded Options in Life Insurance Contracts
Implicit Embedded Options in Life Insurance Contracts

Author: Nils Rüfenacht

Publisher: Springer Science & Business Media

Published: 2012-04-03

Total Pages: 187

ISBN-13: 3790828432

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This book presents a market-consistent valuation framework for implicit embedded options in life insurance contracts. This framework is used to perform an empirical analysis based on more than 110,000 actual and in-force life insurance policies and with a focus on the modeling of interest rates. Its results are the answer to the central question posed in the objectives: What value do the embedded options and guarantees considered have? This question is answered both absolutely and relative to the current policy reserves, from the perspective of the insurer, the policyholder and the shareholder respectively