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Risk-minimizing hedging strategy for an equity-indexed annuity under a regime switching model. (English) Zbl 1326.60111
Summary: The equity-indexed annuity (EIA) contract offers a proportional participation in the performance of a specified equity index, in addition to a guaranteed return on the single premium. How to manage the risk of the EIA is an important issue. This paper considers the hedging of the EIA. We assume that the parameters of the financial model depend on a continuous-time finite-state Markov chain and the Markov chain is observed, that is the Markov regime switching model. The state of the Markov chain can be interpreted as the state of an economy. Under the regime switching model, we obtain the risk-minimizing hedging strategy for the EIA.
60J28 Applications of continuous-time Markov processes on discrete state spaces
60J27 Continuous-time Markov processes on discrete state spaces
91B30 Risk theory, insurance (MSC2010)
91G80 Financial applications of other theories
Full Text: DOI
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