State Price Deflators and Stochastic Discounting

  • Mario V. Wüthrich
  • Michael Merz
Part of the Springer Finance book series (FINANCE)


In this chapter we describe stochastic discounting and valuation of random cash flows in a multiperiod discrete time setting. We therefore start by introducing the term structure of interest rates notion. We briefly discuss the calibration of the actual risk-free interest rate curve using the Svensson and the Nelson–Siegel term structure families. The main purpose of this chapter is then to introduce a consistent multiperiod pricing framework. This consistent multiperiod pricing framework is either based on state price deflators or on equivalent martingale measures which, in particular, lead to a pricing framework free of arbitrage. We introduce these concepts and describe their connection using the market price of risk construction. In fact, we insist of understanding price processes under both concepts (and their connection) because calibration, prediction and pricing consider both frameworks simultaneously.


Interest Rate Cash Flow Term Structure Yield Curve Price Process 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  • Mario V. Wüthrich
    • 1
  • Michael Merz
    • 2
  1. 1.RiskLab, Department of MathematicsETH ZurichZurichSwitzerland
  2. 2.Faculty for Economic and Social Studies, Department of Business AdministrationUniversity of HamburgHamburgGermany

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