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Pricing Equity-Indexed Annuities under a Stochastic Dividend Model

Author

Listed:
  • Yuanchuang Shan

    (College of Information Science and Technology, Donghua University, Shanghai 201620, China)

  • Huisheng Shu

    (College of Science, Donghua University, Shanghai 201620, China)

  • Haoran Yi

    (College of Information Science and Technology, Donghua University, Shanghai 201620, China)

Abstract

In this paper, we examine the valuations of equity-indexed annuities (EIAs) when their reference stocks distribute stochastic dividends. Due to the fact that stocks typically pay dividends at discrete times after the payment dates are announced, pricing EIAs with dividends is deemed to be practically significant. We directly model the discrete dividend payments using the jump diffusion process with regime switching, and then determine the dynamics of the stock price. The equivalent martingale measure of fair valuation in incomplete markets is determined by employing the Esscher transform. Finally, the pricing formulas of several of the most common EIAs in the market under the stochastic dividend model are obtained. Our model incorporates and extends the present literature on EIAs with accurate and effective valuation methods.

Suggested Citation

  • Yuanchuang Shan & Huisheng Shu & Haoran Yi, 2023. "Pricing Equity-Indexed Annuities under a Stochastic Dividend Model," Mathematics, MDPI, vol. 11(3), pages 1-12, January.
    • Handle: RePEc:gam:jmathe:v:11:y:2023:i:3:p:603-:d:1046053
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    References listed on IDEAS

    as
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