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On Fair Valuation of Participating Life Insurance Policies With Regime Switching

In: Hidden Markov Models in Finance

Author

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  • Tak Kuen Siu

    (Heriot-Watt University)

Abstract

Summary We consider the valuation of participating life insurance policies using a regime-switching Esscher transform developed in Elliott, Chan and Siu (2005) when the market values of the reference asset are driven by a Markov-modulated geometric Brownian motion (GBM). We employ the Markov-modulated GBM driven by a continuous-time hidden Markov chain model to describe the impact of the switching behavior of the states of economy on the price dynamics of the reference asset. We also explore the change of measures technique to reduce the dimension of the valuation problem.

Suggested Citation

  • Tak Kuen Siu, 2007. "On Fair Valuation of Participating Life Insurance Policies With Regime Switching," International Series in Operations Research & Management Science, in: Rogemar S. Mamon & Robert J. Elliott (ed.), Hidden Markov Models in Finance, chapter 3, pages 31-43, Springer.
    • Handle: RePEc:spr:isochp:978-0-387-71163-8_3
    DOI: 10.1007/0-387-71163-5_3
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    Cited by:

    1. Georges Dionne & Amir Saissi Hassani, 2015. "Endogenous Hidden Markov Regimes in Operational Loss Data: Application to the Recent Financial Crisis," Cahiers de recherche 1516, CIRPEE.

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