Stochastic modeling and fair valuation of drawdown insurance
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Abstract: This paper studies the stochastic modeling of market drawdown events and the fair valuation of insurance contracts based on drawdowns. We model the asset drawdown process as the current relative distance from the historical maximum of the asset value. We first consider a vanilla insurance contract whereby the protection buyer pays a constant premium over time to insure against a drawdown of a pre-specified level. This leads to the analysis of the conditional Laplace transform of the drawdown time, which will serve as the building block for drawdown insurance with early cancellation or drawup contingency. For the cancellable drawdown insurance, we derive the investor's optimal cancellation timing in terms of a two-sided first passage time of the underlying drawdown process. Our model can also be applied to insure against a drawdown by a defaultable stock. We provide analytic formulas for the fair premium and illustrate the impact of default risk.
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Cites work
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- scientific article; zbMATH DE number 942202 (Why is no real title available?)
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- On Probability Characteristics of "Downfalls" in a Standard Brownian Motion
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- PRICING EQUITY DERIVATIVES SUBJECT TO BANKRUPTCY
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- Quickest Detection
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Cited in
(24)- On the analysis of deep drawdowns for the Lévy insurance risk model
- On future drawdowns of Lévy processes
- Fair dynamic valuation of insurance liabilities: a loss averse convex hedging approach
- Drawdown analysis for the renewal insurance risk process
- The payoff distribution model: an application to dynamic portfolio insurance
- Insurance Considering a New Stochastic Model for the Discount Factor
- Pricing insurance drawdown-type contracts with underlying Lévy assets
- A general method for analysis and valuation of drawdown risk
- Speed and duration of drawdown under general Markov models
- Expected utility of the drawdown-based regime-switching risk model with state-dependent termination
- Optimal discounted drawdowns in a diffusion approximation under proportional reinsurance
- Analysis of a drawdown-based regime-switching Lévy insurance model
- The Parisian and ultimate drawdowns of Lévy insurance models
- Pricing American drawdown options under Markov models
- Drawdown: from practice to theory and back again
- Occupation times, drawdowns, and drawups for one-dimensional regular diffusions
- A unified approach for drawdown (drawup) of time-homogeneous Markov processes
- Maximum drawdown insurance
- Probability distribution and option pricing for drawdown in a stochastic volatility environment
- Optimal valuation of American callable credit default swaps under drawdown of Lévy insurance risk process
- Fair valuation of Lévy-type drawdown-drawup contracts with general insured and penalty functions
- Parisian excursion below a fixed level from the last record maximum of Lévy insurance risk process
- Drawdown and drawup for fractional Brownian motion with trend
- Poissonian potential measures for Lévy risk models
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