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Benchmark Model with Intensity Based Jumps

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Abstract

This paper proposes a class of financial market models with security price processes that exhibit intensity based jumps. Primary security account prices, when expressed in units of the benchmark, turn out to be local martingales. The benchmark model exludes, so called, benchmark arbitrage but permits arbitrage amounts, which arise for benchmarked price processes that are strict local martingales. In the proposed framework, generally, an equivalent risk neutral measure does not exist. Benchmarked fair derivative prices are obtained as conditional expectations of future benchmarked prices under the real world probability measure.

Suggested Citation

  • Eckhard Platen, 2002. "Benchmark Model with Intensity Based Jumps," Research Paper Series 81, Quantitative Finance Research Centre, University of Technology, Sydney.
    • Handle: RePEc:uts:rpaper:81
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    File URL: http://www.qfrc.uts.edu.au/research/research_papers/rp81.pdf
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    Citations

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    Cited by:

    1. Nicola Bruti-Liberati & Christina Nikitopoulos-Sklibosios & Eckhard Platen, 2010. "Real-world jump-diffusion term structure models," Quantitative Finance, Taylor & Francis Journals, vol. 10(1), pages 23-37.
    2. Ashkan Nikeghbali & Eckhard Platen, 2008. "On Honest Times in Financial Modeling," Research Paper Series 229, Quantitative Finance Research Centre, University of Technology, Sydney.
    3. Eckhard Platen & Wolfgang Runggaldier, 2004. "A Benchmark Approach to Filtering in Finance," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 11(1), pages 79-105, March.
    4. Eckhard Platen, 2004. "A Benchmark Framework for Risk Management," World Scientific Book Chapters, in: Jiro Akahori & Shigeyoshi Ogawa & Shinzo Watanabe (ed.), Stochastic Processes And Applications To Mathematical Finance, chapter 15, pages 305-335, World Scientific Publishing Co. Pte. Ltd..
    5. Eckhard Platen & Renata Rendek, 2009. "Simulation of Diversified Portfolios in a Continuous Financial Market," Research Paper Series 264, Quantitative Finance Research Centre, University of Technology, Sydney.
    6. Eckhard Platen, 2004. "Diversified Portfolios with Jumps in a Benchmark Framework," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 11(1), pages 1-22, March.
    7. Eckhard Platen, 2003. "Pricing and Hedging for Incomplete Jump Diffusion Benchmark Models," Research Paper Series 110, Quantitative Finance Research Centre, University of Technology, Sydney.
    8. David Heath & Eckhard Platen, 2006. "Local volatility function models under a benchmark approach," Quantitative Finance, Taylor & Francis Journals, vol. 6(3), pages 197-206.
    9. Nicola Bruti-Liberati & Christina Nikitopoulos-Sklibosios & Eckhard Platen, 2007. "Pricing under the Real-World Probability Measure for Jump-Diffusion Term Structure Models," Research Paper Series 198, Quantitative Finance Research Centre, University of Technology, Sydney.

    More about this item

    Keywords

    benchmark model; jump diffusions; growth optimal portfolio; fair pricing; arbitrage amounts; insurance;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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