Risk/Arbitrage Strategies: A New Concept for Asset/Liability Management, Optimal Fund Design and Optimal Portfolio Selection in a Dynamic, Continuous-Time Framework Part III: A Risk/Arbitrage Pricing Theory
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چکیده
Asset/Liability management, optimal fund design and optimal portfolio selection have been key issues of interest to the (re)insurance and investment banking communities, respectively, for some years especially in the design of advanced risktransfer solutions for clients in the Fortune 500 group of companies. Building on the new concept of limited risk arbitrage investment management in a diffusion type securities and derivatives market introduced in our papers Risk/Arbitrage Strategies: A New Concept for Asset/Liability Management, Optimal Fund Design and Optimal Portfolio Selection in a Dynamic, Continuous-Time Framework Part I: Securities Markets and Part II: Securities and Derivatives Markets, AFIR 1997, Vol. II, p. 543, we outline here a corresponding risk/arbitrage pricing theory that is consistent with an investor’s overall risk management objectives and takes into account drawdown control and limited risk arbitrage constraints on admissible contingent claim replication/hedging strategies. The mathematical framework used is that related to the optimal control of Markov diffusion processes in R” with dynamic programming and continuous-time martingale representation techniques.
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