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Modeling partial Greeks of variable annuities with dependence

Guojun Gan and Emiliano A. Valdez

Insurance: Mathematics and Economics, 2017, vol. 76, issue C, 118-134

Abstract: Dynamic hedging used to mitigate the financial risks associated with large portfolios of variable annuities requires calculating partial dollar deltas on major market indices. Metamodeling approaches have been proposed in the past few years to address the computational issues related to the calculation of partial dollar deltas. In this paper, we investigate whether the additional complication of modeling the dependence between the partial dollar deltas improves the accuracy of the metamodeling approaches. We use several copulas to model the dependence structures of the partial dollar deltas and conduct numerical experiments to compare different metamodels. Despite the evidence of strong dependence in the estimated models, our numerical results show that modeling the dependence structures in the metamodels does not improve the accuracy of the estimations at the portfolio level. This is because the dependence between the partial dollar deltas is well captured by the covariates used in the marginal models. This finding suggests that we should focus more on marginal models than specifying the dependence structure explicitly.

Keywords: Variable annuity; Portfolio valuation; Metamodeling; Gamma distribution; Copula (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.insmatheco.2017.07.006

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