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Imperfect Hedging on Equity-Linked Life Insurance with Market Constraints: Stochastic Interest Rate and Transaction Costs Open Access

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Other title
Subject/Keyword
equity-linked life insurance
imperfect hedging
Type of item
Thesis
Degree grantor
University of Alberta
Author or creator
Tong, Shuo
Supervisor and department
Melnikov, Alexander (Department of Mathematical and Statistical Sciences)
Examining committee member and department
Schmuland, Byron (Department of Mathematical and Statistical Sciences)
Chernousov, Vladimir (Department of Mathematical and Statistical Sciences)
Choulli, Tahir (Department of Mathematical and Statistical Sciences)
Frei, Christoph (Department of Mathematical and Statistical Sciences)
Department
Department of Mathematical and Statistical Sciences
Specialization
Mathematical Finance
Date accepted
2014-01-03T15:43:50Z
Graduation date
2014-06
Degree
Doctor of Philosophy
Degree level
Doctoral
Abstract
Equity-linked life insurance contracts are a type of investment product issued by insurance companies to provide the insured with more appealing benefits, compared with the traditional insurance policy. Such benefits are not only linked to the performance of the underlying investments in the financial market, but also related with some insurance type events, such as death and survival to the contract maturity. Therefore, the equity-linked life insurance contract includes both the financial risk generated from the performance of the risky assets and the insurance risk reflected by the policyholders’ survival probability. In this thesis, we consider the problem of utilizing imperfect hedging techniques to value equity-linked life insurance contract with market restrictions: stochastic interest rate and transaction costs. We employ two powerful imperfect hedging techniques to investigate the problem – quantile hedging and efficient hedging. We show that they are effective tools for managing both financial and insurance risk inherent in equity-linked life insurance contracts in a stochastic interest rate economy. Moreover, we incorporate transaction costs in the analysis of quantile hedging on equity-linked life insurance contract. In chapter 2 and chapter 3, we hedge a single premium equity-linked life insurance contract with a stochastic guarantee from quantile and efficient hedging with a stochastic interest rate respectively. We present the explicit theoretical results for the premium of a contract paying the maximum of two risky asset values at maturity, providing the insured can survive to this date. These results allow the straightforward calculation of survival probabilities for the contract owner, which can quantify the insurance companies’ mortality risk and target their potential clients. Meanwhile, the numerical examples illustrate the corresponding risk management strategies for insurance companies by applying quantile and efficient hedging. Chapter 4 analyzes the application of quantile hedging on equity-linked life insurance contracts in the presence of transaction costs. We obtain the explicit expressions for the expected present values of hedging errors and transaction costs. Furthermore, the estimated expected present values of hedging errors, transaction costs and total hedging costs are also computed from a simulation approach to compare with the theoretical ones. Finally, the quantile hedging costs of the contract’s maturity guarantee inclusive of transaction costs are discussed.
Language
English
DOI
doi:10.7939/R3DB7VZ50
Rights
Permission is hereby granted to the University of Alberta Libraries to reproduce single copies of this thesis and to lend or sell such copies for private, scholarly or scientific research purposes only. Where the thesis is converted to, or otherwise made available in digital form, the University of Alberta will advise potential users of the thesis of these terms. The author reserves all other publication and other rights in association with the copyright in the thesis and, except as herein before provided, neither the thesis nor any substantial portion thereof may be printed or otherwise reproduced in any material form whatsoever without the author's prior written permission.
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