Replicating Portfolio Approach to Capital Calculation

Mathieu Cambou and Damir Filipović
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Mathieu Cambou: Ecole Polytechnique Fédérale de Lausanne
Damir Filipović: Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute

No 16-25, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: The replicating portfolio (RP) approach to the calculation of capital for life insurance portfolios is an industry standard. The RP is obtained from projecting the terminal loss of discounted asset liability cash flows on a set of factors generated by a family of financial instruments that can be efficiently simulated. We provide the mathematical foundations and a novel dynamic and path-dependent RP approach for real-world and risk-neutral sampling. We show that the RP approach yields asymptotically consistent capital estimators. We illustrate the tractability of the RP approach by two numerical examples.

Keywords: asset-liability portfolio; chaos expansion; replicating portfolio; solvency capital (search for similar items in EconPapers)
JEL-codes: C61 C63 D81 G22 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2016-05
New Economics Papers: this item is included in nep-cse, nep-ias and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1625

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