 Hedging insurance booksPeter Carr, Dilip B. Madan, Michael Melamed and Wim Schoutens Insurance: Mathematics and Economics, 2016, vol. 70, issue C, 364-372 Abstract: Complex insurance risks typically have multiple exposures. If available, options on multiple underliers with a short maturity can be employed to hedge this exposure. More precisely, the present value of aggregate payouts is hedged using least squares, ask price minimization, and ask price minimization constrained to long only option positions. The proposed hedges are illustrated for hypothetical Variable Annuity contracts invested in the nine sector ETF’s of the US economy. We simulate the insurance accounts by simulating risk-neutrally the underliers by writing them as transformed correlated normals; the physical and risk-neutral evolution is taken in the variance gamma class as a simple example of a non-Gaussian limit law. The hedges arising from ask price minimization constrained to long only option positions delivers a least cost and most stable result. Keywords: Acceptable risks; Bid and ask prices; Concave distortions; Variance gamma model; Risk premiums; Arrival rates (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:70:y:2016:i:c:p:364-372 DOI: 10.1016/j.insmatheco.2016.05.002 Access Statistics for this article Insurance: Mathematics and Economics is currently edited by R. Kaas, Hansjoerg Albrecher, M. J. Goovaerts and E. S. W. Shiu More articles in Insurance: Mathematics and Economics from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.