Pricing in incomplete markets

This Netspar Panel Paper by Antoon Pelsser (Maastricht University) discusses the pricing of contracts in an incomplete market setting. For life insurance companies and pension funds, it is always the case in practice that not all of the risks in their books can be hedged. Hence, the standard Black-Scholes methodology cannot be applied in this situation. The paper discusses and compares several methods that have been proposed in the literature in recent years: the Cost-of-Capital method (the current industry standard), Good Deal Bound pricing, and pricing under Model Ambiguity.