Replicating portfolio approach to capital calculation

Mathieu Cambou () and Damir Filipović ()
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Mathieu Cambou: Institute of Mathematics
Damir Filipović: Swiss Finance Institute

Finance and Stochastics, 2018, vol. 22, issue 1, No 7, 203 pages

Abstract: Abstract The replicating portfolio (RP) approach to the calculation of capital for life insurance portfolios is an industry standard. The RP is obtained from projecting the terminal loss of discounted asset–liability cash flows on a set of factors generated by a family of financial instruments that can be efficiently simulated. We provide the mathematical foundations and a novel dynamic and path-dependent RP approach for real-world and risk-neutral sampling. We show that our RP approach yields asymptotically consistent capital estimators if the chaotic representation property holds. We illustrate the tractability of the RP approach by three numerical examples.

Keywords: Asset–liability portfolio; Chaos expansion; Replicating portfolio; Solvency capital; 91G60; 91G20; 60H30 (search for similar items in EconPapers)
JEL-codes: C61 C63 D81 G22 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (7)

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DOI: 10.1007/s00780-017-0347-1

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