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.
De Angelis, P., Martire, A.L., Russo, E. (2016). A bivariate model for evaluating equity-linked policies with surrender option. SCANDINAVIAN ACTUARIAL JOURNAL(3), 246-261 [10.1080/03461238.2014.924433].
A bivariate model for evaluating equity-linked policies with surrender option
Antonio Luciano Martire;
2016-01-01
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.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
