Pricing and hedging equity-indexed annuities via local risk-minimization

Linyi Qian, Wei Wang, Ning Wang and Shuai Wang

Communications in Statistics - Theory and Methods, 2019, vol. 48, issue 6, 1417-1434

Abstract: Lin et al. (2009) employed the Esscher transform method to price equity-indexed annuities (EIAs) when the dynamic of the market value of a reference asset was driven by a generalized geometric Brownian motion model with regime-switching. Some rare events (release of an unexpected economic figure, major political changes or even a natural disaster in a major economy) can lead to brusque variations in asset prices, and hence we sometimes need to consider jump models. This paper extends the model and analysis in Lin et al. (2009). Specifically, we assume that the financial market has a regime-switching jump-diffusion model, under which we price the point-to-point, the Asian-end, the high water mark and the annual reset EIAs by exploiting the local risk-minimization approach. The effects of the model parameters on the EIAs pricing are illustrated through numerical experiments. Meanwhile, we present the locally risk-minimizing hedging strategies for EIAs.

Date: 2019
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DOI: 10.1080/03610926.2018.1433848

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