Prof. Dr. Klaus Sandmann

E-mail: ifs(at)
Phone: +49 228 73 9228
Fax: +49 228 735048
Institute: Department of Economics
Research Areas: Research Area H (Leader)
Research Area G
Date of birth: 10.Jun 1961

Academic Career

1987 - 1990

Research Assistant, University of Bonn


PhD, University of Bonn

1990 - 1996

Assistant Professor (C1), University of Bonn


Habilitation, Bonn

1996 - 2002

Professor (C4), University of Mainz

2008 - 2009

Visiting Professor, University of Technology (UTS), Sydney, NSW, Australia

2009 - 2010

Vice Dean, Faculty of Law and Economics, University of Bonn

Since 2002

Professor (C4), University of Bonn

Since 2010

Dean, Faculty of Law and Economics, University of Bonn

Research Profile

The stochastic modeling of the dynamics of a financial market and the understanding of risk management is an important subject within the education program in economics and mathematics. Strengthening the ability of economic students to understand the basic concepts in probability theory and their knowledge of stochastic process up to martingale properties is a difficult task. On the other side the knowledge about financial products, the trading motives and restrictions within a financial market are usually not considered within the mathematical education program. Emphasising these aspects the textbook [10] serves as an attempt to combine these different areas.

Non-standard financial products with broken compounding periods, time delayed payment dates, barrier conditions or individual exercise opportunities are frequently offered by financial institutions. The valuation of these products is derived by numerical procedures. A more robust approach relies on super hedging ideas. The extension of the uncertain volatility approach to the term structure of interest rates is not yet derived. The research agenda is to extent the ideas of super hedging and uncertain volatility to interest rate dependent claims.

Equity linked life and pension insurance contracts are related to financial risk (interest rate, price, index) as well as to non-financial risk (e.g. death and survival risk, premature exercise). The valuation and hedging of these contracts is related to the diversification technique within a cohort of insured persons and to the dynamic duplication by the financial market. Periodic premium and long time to maturity complicates the hedging problem. The research project considers robust contract specifications in the sense of super hedging strategies and model independency. The solution involves the contract design as well as the construction of the underlying financial portfolio.

The current financial crisis has pushed compensation policy like Executives Stock Options (ESOs) at the forefront of the public debate. An on-going discussion is whether ESOs have in fact encouraged the managers to take on too large risks which might improve their own benefits but jeopardize the firm. Sustainability and incentive compatibility are the main qualitative keywords. The approach is to consider non-traditional performance-based ESOs which discourage managers from excessive risk taking. Candidates are Parisian and constrained Asian ESOs. Both contracts impose a restriction on the path of the firm's assets process and make the exaggerated risk taking less likely. Within this research project we focus on the comparison of ESOs and their welfare implications in a utility based framework.

Research Projects and Activities

Bonn Graduate School of Economics,
Board of Directors

DFG Research Training Group GRK 1707 “Heterogeneity, Risk, and Dynamics in Economic Systems”

DFG Research Training Group GRK 629 “Quantitative Economics”

DFG Research Project “Risk Management of Equity Linked Life and Pension Insurance”

Contribution to Research Areas

Research Area G
The valuation and the hedging of complex financial produces involves price risks and interest rate risks at the same time. Complex contract situations can only be approximated by numerical methods or simulations. Prominent examples are average options. An extremely robust super hedging approach has been developed in [1] and [2]. Another example is the time shift of the payment. The financial consequence as well as the valuation and hedging are determined in [3]. Combining price and interest rate risks [4] have determined the valuation of chooser options.
Research Area H
Continuous time stochastic models of the term structure of interest rates serves as basic tools for the pricing and hedging of interest rate dependent derivatives. For the stochastic dynamics of nominal instead of continuously compounded rates [5] showed that expected roll over returns are finite for log-normal models and developed the LIBOR-Market Model in [6]. Beside LIBOR or EURIBOR rates the futures market is very important. [7] extends the existing modeling framework to the futures market and by this develop new and testable no-arbitrage conditions on the volatility surface and determine model independent martingale properties of future rates.

Guarantees included in life and pension insurance are closely related to complex option contracts. However time-to-maturity, contract features and dependency on non-traded risks are different from pure financial contracts. A discussion of these differences is given in [8]; the valuation and risk management of equity-linked life and pension contracts in an incomplete market is considered in [9].

Selected Publications

[1] J. Aase Nielsen, Klaus Sandmann
Pricing of Asian exchange rate options under stochastic interest rates as a sum of options
Finance Stoch. , 6: (3): 355--370
[2] J. Aase Nielsen, Klaus Sandmann
Pricing Bound on Asian Options
Journal of Financial and Quantitative Analysis , 38: (2): 449-473
[3] Antje B. Mahayni, Klaus Sandmann
Return guarantees with delayed payment
Ger. Econ. Rev. , 9: (2): 207--231
[4] Klaus Sandmann, Manuel Wittke
It's your choice: a unified approach to chooser options
Int. J. Theor. Appl. Finance , 13: (1): 139--161
[5] Klaus Sandmann, Dieter Sondermann
A Note on the Stability of Lognormal Interest Rate Models
Mathematical Finance , 7: (2): 119-125
[6] Kristian Miltersen, Klaus Sandmann, Dieter Sondermann
Closed Form Solutions for Term Structure Derivatives with Log--Normal Interest Rates
The Journal of Finance , 52: (1): 409--430
[7] Kristian Risgaard Miltersen, J. Aase Nielsen, Klaus Sandmann
New No-Arbitrage Conditions and the Term structure of Interest Rate Futures
Annals of Finance , 2: (3): 303-325
[8] Klaus Sandmann
Überschussbeteiligung fondsgebundener Lebens- und Rentenversicherungen
Kapitalmarkt, Unternehmensfinanzierung und rationale Entscheidungen, Festsschrift für Jochen Wilhelm
Publisher: Springer-Verlag, Heidelberg
[9] J. Aase Nielsen, Klaus Sandmann
The fair premium of an equity-linked life and pension insurance
Advances in finance and stochastics
Publisher: Springer, Berlin
[10] Klaus Sandmann
Einführung in die Stochastik der Finanzmärkte, 3rd Edition
Publisher: Springer Verlag, Heidelberg

Publication List

MathSciNet Publication List (external link)

RePEc Publication List (external link)



GEFFRUB-Preis (Gesellschaft von Freunden und Förderer der Rheinischen Friedrich-Wilhelms-Universität zu Bonn)


Promotionspreis der GMÖOR (Gesellschaft für Mathematik, Ökonomie und Operations Research)


Antje Mahayni (2006), now Professor, University of Duisburg-Essen

Selected PhD students

An Chen (2007): “Risk Management Of Life Insurance Contracts with Interest Rate and Return Guarantees and an Analysis of Chapter 11 Bankruptcy Procedure”,
now Professor, University of Ulm

Simon Jäger (2008): “Non-linear and stochastically dynamics - Aspects of financial economics in oil markets”

Xia Su (2008): “Essays on Basket Options Hedging and Irreversible Investment Valuation”

Michael Brandl (2009): “CPPI Strategies in Discrete Time”

Sven Balder (2009): “Handelsstrategien mit Mindestgarantien: Eine analytische Beschreibung”

Haishi Huang (2010): “Valuation of Convertible Bonds”,
now Lecturer, College of Business, Shanghai University of Finance and Economics, China

Manuel Wittke (2011): “Essays on Option Valuation under Stochastic Interest Rates”

Supervised Theses

  • Diplom theses: 163, currently 5
  • PhD theses: 15, currently 4
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