Pricing participating products with Markov-modulated jump-diffusion process: an efficient numerical PIDE approach

Farzad Alavi Fard*, Tak Kuen Siu

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

7 Citations (Scopus)

Abstract

We propose a model for the valuation of participating life insurance products under a generalized jump-diffusion model with a Markov-switching compensator. The Esscher transform is employed to determine an equivalent martingale measure in the incomplete market. The results are further manipulated through the utilization of the change of numeraire technique to reduce the dimensions of the pricing formulation. This paper is the first that extends the technique for a generalized jump-diffusion process with a Markov-switching kernel-biased completely random measure, which nests a number of important and popular models in finance. A numerical analysis is conducted to illustrate the practical implications.

Original languageEnglish
Pages (from-to)712-721
Number of pages10
JournalInsurance: Mathematics and Economics
Volume53
Issue number3
DOIs
Publication statusPublished - Nov 2013

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