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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
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: a.a.j.pelsser@uva.nl 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
Information
ASTIN Bulletin: The Journal of the IAA , Volume 38 , Issue 1 , May 2008 , pp. 171 - 181
Copyright
Copyright © ASTIN Bulletin 2008

Footnotes

JEL classification code: G13.

References

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