2011/09/08 by Antoon Pelsser, Pelsser, Antoon
Economics, Econometrics and Finance · #FOS: Economics and business #Pricing of Securities (q-fin.PR) #q-fin.PR
paper · pdf · doi:10.48550/arxiv.1109.1751
arxiv created 2011/09/08 · arxiv updated 2011/09/09
Recent theoretical results establish that time-consistent valuations (i.e. pricing operators) can be created by backward iteration of one-period valuations. In this paper we investigate the continuous-time limits of well-known actuarial premium principles when such backward iteration procedures are applied. We show that the one-period variance premiumprinciple converges to the non-linear exponential indifference valuation. Furthermore, we study the convergence of the one-period standard-deviation principle and establish that the Cost-of-Capital principle, which is widely used by the insurance industry, converges to the same limit as the standard-deviation principle. Finally, we study the connections between our time-consistent pricing operators, Good Deal Bound pricing and pricing under model ambiguity.