Economic neutral position: how to best replicate not fully replicable liabilities?

DOI10.1016/J.INSMATHECO.2020.10.006MaRDI QIDQ2656988zbMATH OpenOpenAlexFDO

Authors Andreas Kunz, Markus Popp

Publication date 17 March 2021

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

Full work available at URL https://arxiv.org/abs/1704.08523

zbMATH Keywords

Cornish-Fisher quantile approximationGram-Charlier seriesincomplete marketsmarket riskreplicating portfoliorisk measurerisk minimal asset allocationSolvency II

Mathematics Subject Classification ID

Actuarial mathematics (91G05)

Abstract: Financial undertakings often have to deal with liabilities of the form 'non-hedgeable claim size times value of a tradeable asset', e.g. foreign property insurance claims times fx rates. Which strategy to invest in the tradeable asset is risk minimal? We generalize the Gram-Charlier series for the sum of two dependent random variable, which allows us to expand the capital requirements based on value-at-risk and expected shortfall. We derive a stable and fairly model independent approximation of the risk minimal asset allocation in terms of the claim size distribution and the moments of asset return. The results enable a correct and easy-to-implement modularization of capital requirements into a market risk and a non-hedgeable risk component.

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Cited in

(1)

• Foreign-currency interest-rate swaps in asset-liability management for insurers

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