A locally risk-minimizing hedging strategy for unit-linked life insurance contracts in a Lévy process financial market

Nele Vandaele and Michèle Vanmaele

Insurance: Mathematics and Economics, 2008, vol. 42, issue 3, 1128-1137

Abstract: In [Riesner, M., 2006. Hedging life insurance contracts in a Lévy process financial market. Insurance Math. Econom. 38, 599-608] the (locally) risk-minimizing hedging strategy for unit-linked life insurance contracts is determined in an incomplete financial market driven by a Lévy process. The considered risky asset is not a martingale under the original measure and therefore, a change of measure to the minimal martingale measure is performed. The goal of this paper is to show that the risk-minimizing hedging strategy under the new martingale measure which is found in the paper cited above is not the locally risk-minimizing strategy under the original measure. Finally, the real locally risk-minimizing strategy is derived and a relationship between the number of risky assets held in the proposed portfolio cited in the above-mentioned paper and the one proposed here is given.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:42:y:2008:i:3:p:1128-1137

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