Optimal Hedging and Pricing of Equity-Linked Life Insurance Contracts in a Discrete-Time Incomplete Market

Norman Josephy, Lucia Kimball and Victoria Steblovskaya

Journal of Probability and Statistics, 2011, vol. 2011, 1-23

Abstract:

We present a method of optimal hedging and pricing of equity-linked life insurance products in an incomplete discrete-time financial market. A pure endowment life insurance contract with guarantee is used as an example. The financial market incompleteness is caused by the assumption that the underlying risky asset price ratios are distributed in a compact interval, generalizing the assumptions of multinomial incomplete market models. For a range of initial hedging capitals for the embedded financial option, we numerically solve an optimal hedging problem and determine a risk-return profile of each optimal non-self-financing hedging strategy. The fair price of the insurance contract is determined according to the insurer's risk-return preferences. Illustrative numerical results of testing our algorithm on hypothetical insurance contracts are documented. A discussion and a test of a hedging strategy recalibration technique for long-term contracts are presented.

Date: 2011
References: Add references at CitEc
Citations:

Downloads: (external link)
http://downloads.hindawi.com/journals/JPS/2011/850727.pdf (application/pdf)
http://downloads.hindawi.com/journals/JPS/2011/850727.xml (text/xml)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hin:jnljps:850727

DOI: 10.1155/2011/850727

Access Statistics for this article

More articles in Journal of Probability and Statistics from Hindawi
Bibliographic data for series maintained by Mohamed Abdelhakeem ().