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Pricing and hedging equity-indexed annuities via local risk-minimization. (English) Zbl 07530892

Summary: X. S. Lin et al. [N. Am. Actuar. J. 13, No. 3, 316–332 (2009; Zbl 1483.91201)] 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 [X. S. Lin et al., N. Am. Actuar. J. 13, No. 3, 316–332 (2009; Zbl 1483.91201)]. 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.

MSC:

91B25 Asset pricing models (MSC2010)
91G20 Derivative securities (option pricing, hedging, etc.)

Citations:

Zbl 1483.91201
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References:

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