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An efficient algorithm for pricing reinsurance contract under the regime-switching model

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  • Abbaspour, Manijeh
  • Vajargah, Kianoush Fathi
  • Azhdari, Parvin

Abstract

This paper suggests a new and efficient variance reduction technique based on the Monte-Carlo simulation method for pricing the reinsurance contract in a regime-switching environment. The proposed approach extends the standard antithetic variables method to K>2 antithetic variables per replication of the Monte-Carlo simulation. Since the model under the regime-switching framework describes a market with arbitrage opportunities, a risk-neutral measure by Esscher transform is provided. Under this probability measure, the proposed estimator is unbiased for pricing the reinsurance contract and increasing K which leads to more variance reduction. Finally, the success of the introduced method is confirmed numerically, and the efficacy of contract parameters is evaluated on its price.

Suggested Citation

  • Abbaspour, Manijeh & Vajargah, Kianoush Fathi & Azhdari, Parvin, 2023. "An efficient algorithm for pricing reinsurance contract under the regime-switching model," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 211(C), pages 278-300.
    • Handle: RePEc:eee:matcom:v:211:y:2023:i:c:p:278-300
    DOI: 10.1016/j.matcom.2023.04.018
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    References listed on IDEAS

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