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Gaussian Process Regression for Pricing Variable Annuities with Stochastic Volatility and Interest Rate

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  • Ludovic Gouden`ege
  • Andrea Molent
  • Antonino Zanette

Abstract

In this paper we investigate price and Greeks computation of a Guaranteed Minimum Withdrawal Benefit (GMWB) Variable Annuity (VA) when both stochastic volatility and stochastic interest rate are considered together in the Heston Hull-White model. We consider a numerical method the solves the dynamic control problem due to the computing of the optimal withdrawal. Moreover, in order to speed up the computation, we employ Gaussian Process Regression (GPR). Starting from observed prices previously computed for some known combinations of model parameters, it is possible to approximate the whole price function on a defined domain. The regression algorithm consists of algorithm training and evaluation. The first step is the most time demanding, but it needs to be performed only once, while the latter is very fast and it requires to be performed only when predicting the target function. The developed method, as well as for the calculation of prices and Greeks, can also be employed to compute the no-arbitrage fee, which is a common practice in the Variable Annuities sector. Numerical experiments show that the accuracy of the values estimated by GPR is high with very low computational cost. Finally, we stress out that the analysis is carried out for a GMWB annuity but it could be generalized to other insurance products.

Suggested Citation

  • Ludovic Gouden`ege & Andrea Molent & Antonino Zanette, 2019. "Gaussian Process Regression for Pricing Variable Annuities with Stochastic Volatility and Interest Rate," Papers 1903.00369, arXiv.org, revised Jul 2019.
    • Handle: RePEc:arx:papers:1903.00369
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    References listed on IDEAS

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    Cited by:

    1. Ludovic Gouden`ege & Andrea Molent & Antonino Zanette, 2019. "Variance Reduction Applied to Machine Learning for Pricing Bermudan/American Options in High Dimension," Papers 1903.11275, arXiv.org, revised Dec 2019.

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