Stochastic Discounting Modeling for Concepts and Operations of Risk Management

Abstract

This chapter concentrates on the formulation, investigation, and applications in real world situations of stochastic discounting models describing fundamental concepts and operations of risk management. The incorporation of important concepts of probability theory in stochastic discounting models makes such stochastic models powerful analytical tools for strategic thinking and strategic decision making. More precisely, the presence of a sum, minimum, and maximum of a random number of continuous, positive, independent, and identically distributed random variables in the mathematical structure of a stochastic model substantially supports the applicability of such a stochastic model in describing, analyzing, selecting, and implementing fundamental risk management operations. In addition, the extremely strong results of the theory of characteristic functions facilitate the use of stochastic discounting models in risk management operations.