An Actuarial Premium Pricing Model for Nonnormal Insurance and Financial Risks in Incomplete Markets

Zinoviy Landsman, Michael Sherris

Research output: Contribution to journalArticlepeer-review

Abstract

A model for pricing insurance and financial risks, based on recent developments in actuarial premium principles with elliptical distributions, is developed for application to incomplete markets and heavy-tailed distributions. The pricing model involves an application of a generalized variance premium principle from insurance pricing to the pricing of a portfolio of nontraded risks relative to a portfolio of traded risks. This pricing model for a portfolio of insurance or financial risks reflects preferences for features of the distributions other than mean and variance, including kurtosis. The model reduces to the Capital Asset Pricing Model for multinormal portfolios and to a form of the CAPM in the case where the traded and nontraded risks have the same elliptical distribution.

Original languageEnglish
Pages (from-to)119-135
Number of pages17
JournalNorth American Actuarial Journal
Volume11
Issue number1
DOIs
StatePublished - 1 Jan 2007

ASJC Scopus subject areas

  • Statistics and Probability
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty

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