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A Characterization of the Esscher-Transformation

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  • Kremer, Erhard

Abstract

One of the central problems in risk theory is the calculation of the distribution function F of aggregate claims of a portfolio. Whereas formerly mainly approximation methods could be used, nowadays the increased speed of the computers allows application of iterative methods of numerical mathematics (see Bertram (1981), Küpper (1971) and Strauss (1976)). Nevertheless some of the classical approximation methods are still of some interest, especially a method developed by Esscher (1932).The idea of this so called Esscher-approximation (see Esscher (1932), Grandell and Widaeus (1969) and Gerber (1980)) is rather simple:In order to calculate 1 –F(x) for large x one transforms F into a distribution function such that the mean value of is equal to x and applies the Edgeworth expansion to the density of The reason for applying the transformation is the fact that the Edgeworth expansion produces good results for x near the mean value, but poor results in the tail (compare also Daniels (1954)).

Suggested Citation

  • Kremer, Erhard, 1982. "A Characterization of the Esscher-Transformation," ASTIN Bulletin, Cambridge University Press, vol. 13(1), pages 57-59, June.
    • Handle: RePEc:cup:astinb:v:13:y:1982:i:01:p:57-59_00
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    Cited by:

    1. López Cabrera, Brenda & Odening, Martin & Ritter, Matthias, 2013. "Pricing rainfall derivatives at the CME," SFB 649 Discussion Papers 2013-005, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    2. repec:hum:wpaper:sfb649dp2013-005 is not listed on IDEAS
    3. López Cabrera, Brenda & Odening, Martin & Ritter, Matthias, 2013. "Pricing rainfall futures at the CME," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4286-4298.

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