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Benchmark-neutral pricing
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DOI：10.1080/14697688.2025.2577115.png)
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Abstract
En 中文
The paper proposes benchmark-neutral pricing and hedging for long-term contingent claims. It employs the growth optimal portfolio of the stocks as num & eacute;raire and the new benchmark-neutral pricing measure for pricing. For the assumed 'natural' dynamics of a well-diversified stock portfolio, which are those of the continuous limit of a branching process of diversified wealth in some activity time, this pricing measure turns out to be an equivalent probability measure. This is not the case for the putative risk-neutral pricing measure. Benchmark-neutral pricing identifies the minimal possible prices of contingent claims. Risk-neutral prices of long-term contracts can be significantly more expensive than necessary. The extremely accurate hedge of a long-term zero-coupon bond illustrates the proposed pricing and hedging method.
Keywords:
Long-term pricing
Benchmark approach
Change of num & eacute
raire
Activity time
Squared Bessel process
Hedging
G10
G11
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IF:
1.4
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