Bachelier model with stopping time and its insurance application

Anna Glazyrina and Alexander Melnikov

Insurance: Mathematics and Economics, 2020, vol. 93, issue C, 156-167

Abstract: A modification of a classical Bachelier model by letting a stock price absorb at zero is revisited. Alternative proofs are given to derive option pricing formulas under the modified Bachelier model and numerical comparison with the Black–Scholes formula is provided. Quantile hedging methodology is developed for both classical and modified Bachelier models and application to pricing the pure endowment with fixed guarantee life insurance contracts is demonstrated, both theoretically and by means of a numerical example.

Keywords: Bachelier model; Black–Scholes; Stopping time; Quantile hedging; Equity-linked life insurance contract; Call option; Absorbing barrier; Default (search for similar items in EconPapers)
JEL-codes: D81 G11 G12 G13 G22 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:93:y:2020:i:c:p:156-167

DOI: 10.1016/j.insmatheco.2020.04.012

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