TY - JOUR
T1 - Pricing and hedging equity-indexed annuities via local risk-minimization
AU - Qian, Linyi
AU - Wang, Wei
AU - Wang, Ning
AU - Wang, Shuai
N1 - Publisher Copyright:
© 2018, © 2018 Taylor & Francis Group, LLC.
PY - 2019/3/19
Y1 - 2019/3/19
N2 - Lin et al. (2009) employed the Esscher transform method to price equity-indexed annuities (EIAs) when the dynamic of the market value of a reference asset was driven by a generalized geometric Brownian motion model with regime-switching. Some rare events (release of an unexpected economic figure, major political changes or even a natural disaster in a major economy) can lead to brusque variations in asset prices, and hence we sometimes need to consider jump models. This paper extends the model and analysis in Lin et al. (2009). Specifically, we assume that the financial market has a regime-switching jump-diffusion model, under which we price the point-to-point, the Asian-end, the high water mark and the annual reset EIAs by exploiting the local risk-minimization approach. The effects of the model parameters on the EIAs pricing are illustrated through numerical experiments. Meanwhile, we present the locally risk-minimizing hedging strategies for EIAs.
AB - Lin et al. (2009) employed the Esscher transform method to price equity-indexed annuities (EIAs) when the dynamic of the market value of a reference asset was driven by a generalized geometric Brownian motion model with regime-switching. Some rare events (release of an unexpected economic figure, major political changes or even a natural disaster in a major economy) can lead to brusque variations in asset prices, and hence we sometimes need to consider jump models. This paper extends the model and analysis in Lin et al. (2009). Specifically, we assume that the financial market has a regime-switching jump-diffusion model, under which we price the point-to-point, the Asian-end, the high water mark and the annual reset EIAs by exploiting the local risk-minimization approach. The effects of the model parameters on the EIAs pricing are illustrated through numerical experiments. Meanwhile, we present the locally risk-minimizing hedging strategies for EIAs.
KW - Equity-indexed annuity
KW - Jump diffusion process
KW - Locally risk-minimizing strategy
KW - Minimal martingale measure
KW - Regime-switching
UR - http://www.scopus.com/inward/record.url?scp=85042064666&partnerID=8YFLogxK
U2 - 10.1080/03610926.2018.1433848
DO - 10.1080/03610926.2018.1433848
M3 - Article
SN - 0361-0926
VL - 48
SP - 1417
EP - 1434
JO - Communications in Statistics - Theory and Methods
JF - Communications in Statistics - Theory and Methods
IS - 6
ER -