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Quantile hedging for equity-linked life insurance contracts in a stochastic interest rate economy

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  • Gao, Quansheng
  • He, Ting
  • Zhang, Chi

Abstract

In this paper we examine equity-linked life insurance contracts in a stochastic interest rate economy via quantile hedging whose purpose is to look for the optimal probability of a successful hedge under initial budget constraint. Most of the existing studies have focused on valuing equity-linked life insurance contracts by quantile hedging or in a framework of stochastic interest rates. However, a few have taken into account simultaneously the two techniques, which make valuing equity-linked life insurance contracts more difficult. We model the term structure of interest rates by classical HJM model that imbeds stochastic interest rate economy into one containing an arbitrary number of additional risky assets. By means of the change of measure approach, we give explicit formulas for the fair values of the following four products: deterministic payoff contract, pure equity-linked life contract, equity-linked life contract with guarantee, equity-linked life contract with minimum guarantees and capped benefits. We find that the explicit formulas are mainly composed of normal distribution functions and two-dimensional normal distribution functions. We also investigate sensibility of the survival probability using data of interest rates, stock prices and life table from China.

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  • Gao, Quansheng & He, Ting & Zhang, Chi, 2011. "Quantile hedging for equity-linked life insurance contracts in a stochastic interest rate economy," Economic Modelling, Elsevier, vol. 28(1), pages 147-156.
    • Handle: RePEc:eee:ecmode:v:28:y:2011:i:1:p:147-156
    DOI: 10.1016/j.econmod.2010.09.016
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    References listed on IDEAS

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    Cited by:

    1. Donald Lien & Ziling Wang & Xiaojian Yu, 2021. "Optimal quantile hedging under Markov regime switching," Empirical Economics, Springer, vol. 60(5), pages 2177-2201, May.

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