Pricing and Hedging GLWB in the Heston and in the Black-Scholes with Stochastic Interest Rate Models

Ludovic Goudenege, Andrea Molent and Antonino Zanette

Papers from arXiv.org

Abstract: Valuing Guaranteed Lifelong Withdrawal Benefit (GLWB) has attracted significant attention from both the academic field and real world financial markets. As remarked by Forsyth and Vetzal the Black and Scholes framework seems to be inappropriate for such long maturity products. They propose to use a regime switching model. Alternatively, we propose here to use a stochastic volatility model (Heston model) and a Black Scholes model with stochastic interest rate (Hull White model). For this purpose we present four numerical methods for pricing GLWB variables annuities: a hybrid tree-finite difference method and a hybrid Monte Carlo method, an ADI finite difference scheme, and a standard Monte Carlo method. These methods are used to determine the no-arbitrage fee for the most popular versions of the GLWB contract, and to calculate the Greeks used in hedging. Both constant withdrawal and optimal withdrawal (including lapsation) strategies are considered. Numerical results are presented which demonstrate the sensitivity of the no-arbitrage fee to economic, contractual and longevity assumptions.

Date: 2015-09
New Economics Papers: this item is included in nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Insurance: Mathematics and Economics. Volume 70, September 2016, Pages 38-57

Downloads: (external link)
http://arxiv.org/pdf/1509.02686 Latest version (application/pdf)

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:arx:papers:1509.02686

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().