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A Multinomial Approximation Approach for the Finite Time Survival Probability Under the Markov-modulated Risk Model

Author

Listed:
  • Jingchao Li

    (Shenzhen University
    Shenzhen University)

  • Bihao Su

    (Shanghai University of Finance and Economics)

  • Zhenghong Wei

    (Shenzhen University)

  • Ciyu Nie

    (Nanyang Technological University)

Abstract

In this paper, we consider the problem of computing different types of finite time survival probabilities for a Markov-Modulated risk model and a Markov-Modulated risk model with reinsurance, both with varying premium rates. We use the multinomial approximation scheme to derive an efficient recursive algorithm to compute finite time survival probabilities and finite time draw-down survival probabilities. Numerical results show that by comparing with MCMC approximation, discretize approximation and diffusion approximation methods, the proposed scheme performs accurate results in all the considered cases and with better computation efficiency.

Suggested Citation

  • Jingchao Li & Bihao Su & Zhenghong Wei & Ciyu Nie, 2022. "A Multinomial Approximation Approach for the Finite Time Survival Probability Under the Markov-modulated Risk Model," Methodology and Computing in Applied Probability, Springer, vol. 24(3), pages 2169-2194, September.
    • Handle: RePEc:spr:metcap:v:24:y:2022:i:3:d:10.1007_s11009-021-09897-z
    DOI: 10.1007/s11009-021-09897-z
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    References listed on IDEAS

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