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

Linyi Qian, Wei Wang, Ning Wang, Shuai Wang

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)

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.

Original languageEnglish
Pages (from-to)1417-1434
Number of pages18
JournalCommunications in Statistics - Theory and Methods
Volume48
Issue number6
DOIs
Publication statusPublished - 19 Mar 2019
Externally publishedYes

Keywords

  • Equity-indexed annuity
  • Jump diffusion process
  • Locally risk-minimizing strategy
  • Minimal martingale measure
  • Regime-switching

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