Pricing the option to surrender in incomplete markets

Andrea Consiglio, Domenico De Giovanni

Risultato della ricerca: Article

9 Citazioni (Scopus)

Abstract

New international accounting standards require insurers to reflect the value of embedded options and guarantees in their products. Pricing techniques based on the Black and Scholes paradigm are often used; however, the hypotheses underneath this model are rarely met. We propose a framework that encompasses the most known sources of incompleteness. We show that the surrender option, joined with a wide range of claims embedded in insurance contracts, can be priced through our tool, and deliver hedging portfolios to mitigate the risk arising from their positions. We provide extensive empirical analysis to highlight the effect of incompleteness on the fair value of the option.
Lingua originaleEnglish
pagine (da-a)935-957
Numero di pagine22
RivistaJOURNAL OF RISK AND INSURANCE
Volume77
Stato di pubblicazionePublished - 2010

Fingerprint

Incomplete markets
Pricing
Incompleteness
Empirical analysis
International accounting standards
Hedging
Fair value
Guarantee
Surrender option
Insurance contract
Insurer
Embedded options
Paradigm

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cita questo

Pricing the option to surrender in incomplete markets. / Consiglio, Andrea; De Giovanni, Domenico.

In: JOURNAL OF RISK AND INSURANCE, Vol. 77, 2010, pag. 935-957.

Risultato della ricerca: Article

Consiglio, A & De Giovanni, D 2010, 'Pricing the option to surrender in incomplete markets', JOURNAL OF RISK AND INSURANCE, vol. 77, pagg. 935-957.
Consiglio A, De Giovanni D. Pricing the option to surrender in incomplete markets. JOURNAL OF RISK AND INSURANCE. 2010;77:935-957.
Consiglio, Andrea ; De Giovanni, Domenico. / Pricing the option to surrender in incomplete markets. In: JOURNAL OF RISK AND INSURANCE. 2010 ; Vol. 77. pagg. 935-957.
@article{059928a4dbe3483da6a8034176bdb456,
title = "Pricing the option to surrender in incomplete markets",
abstract = "New international accounting standards require insurers to reflect the value of embedded options and guarantees in their products. Pricing techniques based on the Black and Scholes paradigm are often used; however, the hypotheses underneath this model are rarely met. We propose a framework that encompasses the most known sources of incompleteness. We show that the surrender option, joined with a wide range of claims embedded in insurance contracts, can be priced through our tool, and deliver hedging portfolios to mitigate the risk arising from their positions. We provide extensive empirical analysis to highlight the effect of incompleteness on the fair value of the option.",
keywords = "Life insurance, incomplete markets, option pricing, policies with minimum guarantee, surrender options",
author = "Andrea Consiglio and {De Giovanni}, Domenico",
year = "2010",
language = "English",
volume = "77",
pages = "935--957",
journal = "JOURNAL OF RISK AND INSURANCE",
issn = "0022-4367",

}

TY - JOUR

T1 - Pricing the option to surrender in incomplete markets

AU - Consiglio, Andrea

AU - De Giovanni, Domenico

PY - 2010

Y1 - 2010

N2 - New international accounting standards require insurers to reflect the value of embedded options and guarantees in their products. Pricing techniques based on the Black and Scholes paradigm are often used; however, the hypotheses underneath this model are rarely met. We propose a framework that encompasses the most known sources of incompleteness. We show that the surrender option, joined with a wide range of claims embedded in insurance contracts, can be priced through our tool, and deliver hedging portfolios to mitigate the risk arising from their positions. We provide extensive empirical analysis to highlight the effect of incompleteness on the fair value of the option.

AB - New international accounting standards require insurers to reflect the value of embedded options and guarantees in their products. Pricing techniques based on the Black and Scholes paradigm are often used; however, the hypotheses underneath this model are rarely met. We propose a framework that encompasses the most known sources of incompleteness. We show that the surrender option, joined with a wide range of claims embedded in insurance contracts, can be priced through our tool, and deliver hedging portfolios to mitigate the risk arising from their positions. We provide extensive empirical analysis to highlight the effect of incompleteness on the fair value of the option.

KW - Life insurance

KW - incomplete markets

KW - option pricing

KW - policies with minimum guarantee

KW - surrender options

UR - http://hdl.handle.net/10447/52892

M3 - Article

VL - 77

SP - 935

EP - 957

JO - JOURNAL OF RISK AND INSURANCE

JF - JOURNAL OF RISK AND INSURANCE

SN - 0022-4367

ER -

Accesso al documento