A Benchmark Framework for Integrated Risk Management

The paper describes a consistent, integrated framework for modeling and pricing in finance, insurance and other areas of risk management. The growth optimal portfolio is taken as a benchmark. In the resulting price system expected future benchmarked, nonnegative prices are not greater that the last observed benchmarked price. The resulting benchmark model does not permit the generation of wealth from zero initial capital or the systemtic outperformance of the benchmark. Benchmarked fair price processes are defined as best forecasts of their benchmarked future values. Risk neutral and actuarial pricing formulae are obtained as special cases. Certain arbitrage amounts can still be modeled in this framework.