Pricing participating products with Markov-modulated jump–diffusion process: An efficient numerical PIDE approach

Farzad Alavi Fard and Tak Kuen Siu

Insurance: Mathematics and Economics, 2013, vol. 53, issue 3, 712-721

Abstract: We propose a model for the valuation of participating life insurance products under a generalized jump–diffusion model with a Markov-switching compensator. The Esscher transform is employed to determine an equivalent martingale measure in the incomplete market. The results are further manipulated through the utilization of the change of numeraire technique to reduce the dimensions of the pricing formulation. This paper is the first that extends the technique for a generalized jump–diffusion process with a Markov-switching kernel-biased completely random measure, which nests a number of important and popular models in finance. A numerical analysis is conducted to illustrate the practical implications.

Keywords: Participating products; Generalized jump–diffusion model; Markov-switching compensator; Esscher transform; Reduction of dimensionality; Collocation method (search for similar items in EconPapers)
JEL-codes: D52 G13 G22 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:53:y:2013:i:3:p:712-721

DOI: 10.1016/j.insmatheco.2013.09.011

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