Calculating Deflators
Document ID: 2003-785 (previously 2002/004)
Published on: 1st January 2003
Author: Craig Turnbull
In 2002, much B&H life office research has been concerned with the market-consistent valuation of liabilities. As part of this valuation discussion, the question arises of whether to use state-price deflators or risk-neutral valuation techniques. Whilst this is really a second-order issue (because, by definition, the two techniques give the same answer and there are many other issues in this field that will have a big affect on the answer), we nonetheless comment on this topic here. We have generally argued that the interest in the use of state price deflators to value contingent claims is rather misplaced. We will not repeat these arguments here. Instead, to demonstrate we are enlightened and balanced fellows, this note discusses approaches to calculating deflators for our stochastic models.
