Open AccessCVaR-hedging and its applications to equity-linked life insurance contracts with transaction costs
Author(s) -
Alexander Melnikov,
Hongxi Wan
Publication year - 2021
Publication title -
probability, uncertainty and quantitative risk
Language(s) - English
Resource type - Journals
eISSN - 2095-9672
pISSN - 2367-0126
DOI - 10.3934/puqr.2021017
Subject(s) - cvar , transaction cost , equity (law) , life insurance , economics , portfolio , actuarial science , volatility (finance) , replicating portfolio , expected shortfall , econometrics , financial economics , microeconomics , portfolio optimization , political science , law
This paper analyzes Conditional Value-at-Risk (CVaR) based partial hedging and its applications on equity-linked life insurance contracts in a Jump-Diffusion market model with transaction costs. A nonlinear partial differential equation (PDE) that an option value process inclusive of transaction costs should satisfy is provided. In particular, the closed-form expression of a European call option price is given. Meanwhile, the CVaR-based partial hedging strategy for a call option is derived explicitly. Both the CVaR hedging price and the weights of the hedging portfolio are based on an adjusted volatility. We obtain estimated values of expected total hedging errors and total transaction costs by a simulation method. Furthermore,our results are implemented to derive target clients’ survival probabilities and age of equity-linked life insurance contracts.