A class of complete benchmark models with intensity-based jumps

Publication Type:
Journal Article
Citation:
Journal of Applied Probability, 2004, 41 (1), pp. 19 - 34
Issue Date:
2004-03-01
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This paper proposes a class of complete financial market models, the benchmark models, with security price processes that exhibit intensity-based jumps. The benchmark or reference unit is chosen to be the growth-optimal portfolio. Primary security account prices, when expressed in units of the benchmark, turn out to be local martingales. In the proposed framework an equivalent risk-neutral measure need not exist. Benchmarked fair derivative prices are obtained as conditional expectations of future benchmarked prices under the real-world probability measure. This concept of fair pricing generalizes the classical risk-neutral approach and the actuarial present-value pricing methodology.
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