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1 results

  • No-Good-Deal, Local Mean-Variance and Ambiguity Risk Pricing and Hedging for an Insurance Payment Process

  • Łukasz Delong
  • Journal:
    ASTIN Bulletin: The Journal of the IAA / Volume 42 / Issue 1 / May 2012
    Published online by Cambridge University Press:
    09 August 2013, pp. 203-232
    Print publication:
    May 2012

  • We study pricing and hedging for an insurance payment process. We investigate a Black-Scholes financial model with stochastic coefficients and a payment process with death, survival and annuity claims driven by a point process with a stochastic intensity. The dependence of the claims and the intensity on the financial market and on an additional background noise (correlated index, longevity risk) is allowed. We establish a general modeling framework for no-good-deal, local mean-variance and ambiguity risk pricing and hedging. We show that these three valuation approaches are equivalent under appropriate formulations. We characterize the price and the hedging strategy as a solution to a backward stochastic differential equation. The results could be applied to pricing and hedging of variable annuities, surrender options under an irrational lapse behavior and mortality derivatives.