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On the Applicability of the Wang Transform for Pricing Financial Risks

Published online by Cambridge University Press:  17 April 2015

Antoon Pelsser*
Affiliation:
University of Amsterdam and NETSPAR, Dept. of Quantitative Economics, Roetersstraat 11, 1018 WB Amsterdam, The Netherlands, Tel.: (31)20-525 4210, Fax: (31)20-525 4349, E-Mail: [email protected] Home-page: http://www.ase.uva.nl/pp/apelsser
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Abstract

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In an arbitrage-free economy, it is well-known that financial risks can be priced using equivalent martingale measures. We establish in this paper that, for general stochastic processes, the Wang Transform does not lead to a price which is consistent with the arbitrage-free price. Based on these results we must conclude that the Wang Transform cannot be a universal framework for pricing financial and insurance risks.

Type
Articles
Copyright
Copyright © ASTIN Bulletin 2008

Footnotes

JEL classification code: G13.

References

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Wang, S. (2002) “A Universal Framework for Pricing Financial and Insurance Risk”, ASTIN Bulletin, 32(2), 213234.CrossRefGoogle Scholar