Regarding the arbitrage-free
pricing of ART instruments related to index-linked catastrophe loss instruments, there is a wide literature, which is outlined in what follows.
For instance, Ang and Piazzesi (2003) find that it outperforms unrestricted vector auto-regressions (VARs), and only manage to slightly beat it (although not for all maturities) using an arbitrage-free
model with macroeconomic factors.
The following section presents the Nelson-Siegel Term Structure Models and explains how this model is extended to an arbitrage-free
We assume that the market [M.sup.n+1] is arbitrage-free
complete and continuously open.
Implied volatility functions in arbitrage-free
term structure models.
(34.) An arbitrage-free
model assigns prices to derivatives or other instruments in such a way that it is impossible to construct arbitrages between two or more of those prices.
This is an arbitrage-free
model of bond pricing because it satisfies equation (1) for a given pricing kernel [m.sub.t].
One can show this directly (24) or as a consequence of the theorem, because only prices consistent with risk-neutral valuation are arbitrage-free
(2.) Although consumer resale as described by Oi would be less desirable than two-part pricing in an arbitrage-free
market, the firm must be strictly better off with a nonlinear pricing scheme and the possibility of resale than with nondiscriminatory linear pricing.
Piazzesi develops an arbitrage-free
time-series model of yields that incorporates central bank policy.
Real options began to be properly understood in 1973, when Fischer Black, Myron Scholes, and Robert Merton devised rigorous "arbitrage-free
" solutions to value them.
Each spanning portfolio provides one estimate of the arbitrage-free
return series for the target division.