Pricing Equity-Indexed Annuities under a Stochastic Dividend Model

Yuanchuang Shan, Huisheng Shu () and Haoran Yi
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Yuanchuang Shan: College of Information Science and Technology, Donghua University, Shanghai 201620, China
Huisheng Shu: College of Science, Donghua University, Shanghai 201620, China
Haoran Yi: College of Information Science and Technology, Donghua University, Shanghai 201620, China

Mathematics, 2023, vol. 11, issue 3, 1-12

Abstract: In this paper, we examine the valuations of equity-indexed annuities (EIAs) when their reference stocks distribute stochastic dividends. Due to the fact that stocks typically pay dividends at discrete times after the payment dates are announced, pricing EIAs with dividends is deemed to be practically significant. We directly model the discrete dividend payments using the jump diffusion process with regime switching, and then determine the dynamics of the stock price. The equivalent martingale measure of fair valuation in incomplete markets is determined by employing the Esscher transform. Finally, the pricing formulas of several of the most common EIAs in the market under the stochastic dividend model are obtained. Our model incorporates and extends the present literature on EIAs with accurate and effective valuation methods.

Keywords: equity-indexed annuities; stochastic dividend; announced in advance; Esscher transform (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2023
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