Discrete sums of geometric Brownian motions, annuities and Asian options

Dan Pirjol and Lingjiong Zhu

Insurance: Mathematics and Economics, 2016, vol. 70, issue C, 19-37

Abstract: The discrete sum of geometric Brownian motions plays an important role in modeling stochastic annuities in insurance. It also plays a pivotal role in the pricing of Asian options in mathematical finance. In this paper, we study the probability distributions of the infinite sum of geometric Brownian motions, the sum of geometric Brownian motions with geometric stopping time, and the finite sum of the geometric Brownian motions. These results are extended to the discrete sum of the exponential Lévy process. We derive tail asymptotics and compute numerically the asymptotic distribution function. We compare the results against the known results for the continuous time integral of the geometric Brownian motion up to an exponentially distributed time. The results are illustrated with numerical examples for life annuities with discrete payments, and Asian options.

Keywords: Sum of geometric Brownian motions; Stochastic recurrence equations; Geometric stopping; Annuities; Asian options; Exponential Lévy processes (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:70:y:2016:i:c:p:19-37

DOI: 10.1016/j.insmatheco.2016.05.020

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