Risk-neutral methods or deflators?
Document ID: 2002-786 (previously 2002/001)
Published on: 31st March 2002
Author: John Hibbert, Craig Turnbull, Steven Morrison
This note highlights a particular issue faced by actuaries and accountants when they set out to build effective valuation tools. Specifically, our aim is to highlight some of the disadvantages of the fashionable so-called ‘deflator’ approach to contingent claims valuation. We contrast the deflator methodology with the widely-used risk-neutral pricing technique and explain why we believe it is highly inefficient, cumbersome and costly compared to conventional methods.
