This article proposes a bivariate lattice model for evaluating equity-linked policies embedding a surrender option when the underlying equity dynamics is described by a geometric Brownian motion with stochastic interest rate. The main advantage of the model stays in that the original processes for the reference fund and the interest rate are directly discretized by means of lattice approximations, without resorting to any additional transformation. Then, the arising lattices are combined in order to establish a bivariate tree where equity-linked policy premiums are computed by discounting the policy payoff over the lattice branches, and allowing early exercise at each premium payment date to model the surrender decision. © 2014 © 2014 Taylor & Francis.
A bivariate model for evaluating equity-linked policies with surrender option / DE ANGELIS, Paolo; Martire, ANTONIO LUCIANO; Emilio, Russo. - In: SCANDINAVIAN ACTUARIAL JOURNAL. - ISSN 0346-1238. - ELETTRONICO. - 3(2016), pp. 246-261. [10.1080/03461238.2014.924433]
A bivariate model for evaluating equity-linked policies with surrender option
DE ANGELIS, Paolo
Primo
Conceptualization
;Antonio Luciano MartireSecondo
Methodology
;
2016
Abstract
This article proposes a bivariate lattice model for evaluating equity-linked policies embedding a surrender option when the underlying equity dynamics is described by a geometric Brownian motion with stochastic interest rate. The main advantage of the model stays in that the original processes for the reference fund and the interest rate are directly discretized by means of lattice approximations, without resorting to any additional transformation. Then, the arising lattices are combined in order to establish a bivariate tree where equity-linked policy premiums are computed by discounting the policy payoff over the lattice branches, and allowing early exercise at each premium payment date to model the surrender decision. © 2014 © 2014 Taylor & Francis.File | Dimensione | Formato | |
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