Fair Premiums of Drawdown Insurances

Zhang Hongzhong

Chapter 8 in Stochastic Drawdowns, 2018, pp 175-201 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Our study on drawdown insurance in Chapter 8 approaches the protection against drawdowns differently. In particular, we derive the fair premium for a drawdown insurance that delivers a fixed compensation upon an drawdown event. In order to provide the investor with more flexibility in managing the path-dependent drawdown risk, we also incorporate the right to terminate the contract early. We formulate an optimal stopping problem that aims to maximize the early termination premium. By using the principle of smooth pasting, we solve the associated variational inequality and identify the optimal cancellation strategy as a first passage time of the drawdown process, which subsequently determines the fair premium of the contract. Moreover, we expand our analysis of drawdown insurance contracts by incorporating a drawup contingency, and the default risk of the underlying — a feature absent in other related studies on drawdown, and studying their impacts to the fair premium.

Keywords: Drawdown; Maximum Drawdown; Insurance; Optimal Trading (search for similar items in EconPapers)
JEL-codes: C02 G32 (search for similar items in EconPapers)
Date: 2018
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.worldscientific.com/doi/pdf/10.1142/9789813141643_0008 (application/pdf)
https://www.worldscientific.com/doi/abs/10.1142/9789813141643_0008 (text/html)
Ebook Access is available upon purchase.

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:wsi:wschap:9789813141643_0008

Ordering information: This item can be ordered from

Access Statistics for this chapter

More chapters in World Scientific Book Chapters from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().