IDEAS home Printed from https://ideas.repec.org/h/wsi/wschap/9789813141643_0008.html
   My bibliography  Save this book chapter

Fair Premiums of Drawdown Insurances

In: Stochastic Drawdowns

Author

Listed:
  • Zhang Hongzhong

Abstract

Our study on drawdown insurance in Chapter 8 approaches the protection against drawdowns differently. In particular, we derive the fair premium for a drawdown insurance that delivers a fixed compensation upon an drawdown event. In order to provide the investor with more flexibility in managing the path-dependent drawdown risk, we also incorporate the right to terminate the contract early. We formulate an optimal stopping problem that aims to maximize the early termination premium. By using the principle of smooth pasting, we solve the associated variational inequality and identify the optimal cancellation strategy as a first passage time of the drawdown process, which subsequently determines the fair premium of the contract. Moreover, we expand our analysis of drawdown insurance contracts by incorporating a drawup contingency, and the default risk of the underlying — a feature absent in other related studies on drawdown, and studying their impacts to the fair premium.

Suggested Citation

  • Zhang Hongzhong, 2018. "Fair Premiums of Drawdown Insurances," World Scientific Book Chapters, in: Stochastic Drawdowns, chapter 8, pages 175-201, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813141643_0008
    as

    Download full text from publisher

    File URL: https://www.worldscientific.com/doi/pdf/10.1142/9789813141643_0008
    Download Restriction: Ebook Access is available upon purchase.
    File URL: https://www.worldscientific.com/doi/abs/10.1142/9789813141643_0008
    Download Restriction: Ebook Access is available upon purchase.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Drawdown; Maximum Drawdown; Insurance; Optimal Trading;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:wschap:9789813141643_0008. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscientific.com/page/worldscibooks .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.