VIX-linked fees for GMWBs via explicit solution simulation methods

DOI10.1016/J.INSMATHECO.2018.04.001zbMATH Open1416.91197arXiv1708.06886OpenAlexW2963198270WikidataQ129929368 ScholiaQ129929368MaRDI QIDQ1667404FDOQ1667404

Authors: Michael A. Kouritzin, Anne MacKay 

Publication date: 28 August 2018

Published in: Insurance Mathematics \& Economics (Search for Journal in Brave)

Abstract: In a market with stochastic volatility and jumps, we consider a VIX-linked fee structure for variable annuity contracts with guaranteed minimum withdrawal benefits (GMWB). Our goal is to assess the effectiveness of the VIX-linked fee structure in decreasing the sensitivity of the insurer's liability to volatility risk. Since the GMWB payoff is highly path-dependent, it is particularly sensitive to volatility risk, and can also be challenging to price, especially in the presence of the VIX-linked fee. In this paper, we present an explicit weak solution for the value of the VA account and use it in Monte Carlo simulations to value the GMWB guarantee. Numerical examples are provided to analyze the impact of the VIX-linked fee on the sensitivity of the liability to changes in market volatility.

Full work available at URL: https://arxiv.org/abs/1708.06886

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zbMATH Keywords

Monte Carlo simulationstochastic differential equationexplicit solutionvariable annuitiesHeston model

Mathematics Subject Classification ID

Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Financial applications of other theories (91G80)

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Cited In (7)

• A semi-Lagrangian \(\epsilon\)-monotone Fourier method for continuous withdrawal GMWBs under jump-diffusion with stochastic interest rate
• Analysis of VIX-linked fee incentives in variable annuities via continuous-time Markov chain approximation
• Levelling the playing field: a VIX-linked structure for funded pension schemes
• Variable annuities with VIX-linked fee structure under a Heston-type stochastic volatility model
• On explicit local solutions of Itô diffusions
• Optimal VIX-linked structure for the target benefit pension plan
• Valuation of guaranteed lifelong withdrawal benefit with the long-term care option

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