Abstract
We consider the pricing of a maturity guarantee, which is equivalent to the pricing of a European put option, in a regime-switching market model. Regime-switching market models have been empirically shown to fit long-term stockmarket data better than many other models.
However, since a regime-switching market is incomplete, there is no unique price for the maturity guarantee. We extend the good-deal pricing bounds idea to the regime-switching market model. This allows us to obtain a reasonable range of prices for the maturity guarantee, by excluding those prices which imply a Sharpe Ratio which is too high. The range of prices can be used as a plausibility check on the chosen price of a maturity guarantee.
However, since a regime-switching market is incomplete, there is no unique price for the maturity guarantee. We extend the good-deal pricing bounds idea to the regime-switching market model. This allows us to obtain a reasonable range of prices for the maturity guarantee, by excluding those prices which imply a Sharpe Ratio which is too high. The range of prices can be used as a plausibility check on the chosen price of a maturity guarantee.
| Original language | English |
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| Title of host publication | Actuarial and Financial Mathematics Conference |
| Subtitle of host publication | Interplay between Finance and Insurance |
| Publisher | Koninklijke Vlaamse Academie van Belgie |
| Pages | 17-28 |
| Number of pages | 12 |
| ISBN (Print) | 978 90 6569 087 6 |
| Publication status | Published - 2011 |
| Event | Actuarial and Financial Mathematics Conference Interplay between Finance and Insurance - Belguim, Brussels, Belgium Duration: 6 Feb 2014 → 7 Feb 2014 |
Conference
| Conference | Actuarial and Financial Mathematics Conference Interplay between Finance and Insurance |
|---|---|
| Country/Territory | Belgium |
| City | Brussels |
| Period | 6/02/14 → 7/02/14 |