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Variable annuities in a Lévy-based hybrid model with surrender risk

Ballotta, L. ORCID: 0000-0002-2059-6281, Eberlein, E., Schmidt, T. and Zeineddine, R. (2019). Variable annuities in a Lévy-based hybrid model with surrender risk. Quantitative Finance, doi: 10.1080/14697688.2019.1687929

Abstract

This paper proposes a market consistent valuation framework for variable annuities with guaranteed minimum accumulation benefit, death benefit and surrender benefit features. The setup is based on a hybrid model for the financial market and uses time-in homogeneous Levy processes as risk drivers. Further, we allow for dependence between financial and surrender risks. Our model leads to explicit analytical formulas for the quantities of interest, and practical and efficient numerical procedures for the evaluation of these formulas. We illustrate the tractability of this approach by means of a detailed sensitivity analysis of the fair value of the variable annuity and its components with respect to the model parameters. The results highlight the role played by the surrender behaviour and the importance of its appropriate modelling.

Publication Type: Article
Additional Information: This is an Accepted Manuscript of an article published by Taylor & Francis in Quantitative Finance on 27 November 2019, available online: https://www.tandfonline.com/10.1080/14697688.2019.1687929.
Publisher Keywords: Finance; variable annuities; hybrid models; Levy processes; surrender risk
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: https://openaccess.city.ac.uk/id/eprint/23052
[img] Text - Accepted Version
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