Quantile hedging on equity-linked life insurance contracts with transaction costs

Alexander Melnikov and Shuo Tong

Insurance: Mathematics and Economics, 2014, vol. 58, issue C, 77-88

Abstract: This paper analyzes the application of quantile hedging on equity-linked life insurance contracts in the presence of transaction costs. Following the time-based replication strategy, we present the explicit expressions for the present values of expected hedging errors and transaction costs. The results are derived by using the adjusted hedging volatility σ̄ proposed by Leland. Furthermore, the estimated values of expected hedging errors, transaction costs and total costs are obtained from a simulation approach for comparison. Finally, the costs of maturity guarantee for equity-linked life insurance contracts inclusive of transaction costs are discussed.

Keywords: Quantile hedging; Equity-linked life insurance; Transaction costs; Adjusted hedging volatility; Hedging costs (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:58:y:2014:i:c:p:77-88

DOI: 10.1016/j.insmatheco.2014.06.005

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