An identity of hitting times and its application to the valuation of guaranteed minimum withdrawal benefit

DOI10.1007/S11579-015-0153-5zbMATH Open1404.91256arXiv1307.7070OpenAlexW2097416433MaRDI QIDQ253095FDOQ253095

Authors: Runhuan Feng, Hans W. Volkmer 

Publication date: 8 March 2016

Published in: Mathematics and Financial Economics (Search for Journal in Brave)

Abstract: In this paper we explore an identity in distribution of hitting times of a finite variation process (Yor's process) and a diffusion process (geometric Brownian motion with affine drift), which arise from various applications in financial mathematics. As a result, we provide analytical solutions to the fair charge of variable annuity guaranteed minimum withdrawal benefit (GMWB) from a policyholder's point of view, which was only previously obtained in the literature by numerical methods. We also use complex inversion methods to derive analytical solutions to the fair charge of the GMWB from an insurer's point of view, which is used in the market practice, however, based on Monte Carlo simulations. Despite of their seemingly different formulations, we can prove under certain assumptions the two pricing approaches are equivalent.

Full work available at URL: https://arxiv.org/abs/1307.7070

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zbMATH Keywords

option pricingconfluent hypergeometric functionsgeometric Brownian motion with affine driftguaranteed minimum withdrawal benefithitting timevariable annuity guaranteed benefitsYor's process

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70)

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Cited In (15)

• SPECTRAL METHODS FOR THE CALCULATION OF RISK MEASURES FOR VARIABLE ANNUITY GUARANTEED BENEFITS
• Coping with longevity via hedging: fair dynamic valuation of variable annuities
• Analytical valuation and hedging of variable annuity guaranteed lifetime withdrawal benefits
• Risk based capital for guaranteed minimum withdrawal benefit
• Variable annuity pricing, valuation, and risk management: a survey
• Variable Annuities with VIX-Linked Fee Structure under a Heston-Type Stochastic Volatility Model
• Analytic valuation of guaranteed lifetime withdrawal benefits with a modified ratchet
• A tail measure with variable risk tolerance: application in dynamic portfolio insurance strategy
• Quantitative modeling of risk management strategies: stochastic reserving and hedging of variable annuity guaranteed benefits
• Geometric Brownian motion with affine drift and its time-integral
• INTEGRAL REPRESENTATION OF PROBABILITY DENSITY OF STOCHASTIC VOLATILITY MODELS AND TIMER OPTIONS
• Statutory financial reporting for variable annuity guaranteed death benefits: market practice, mathematical modeling and computation
• Applications of central limit theorems for equity-linked insurance
• Conditional moment matching and stratified approximation for pricing and hedging periodic-premium variable annuities
• An overview of exact solution methods for guaranteed minimum death benefit options in variable annuities

Uses Software

• Digital Library of Mathematical Functions

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