IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/18844.html
   My bibliography  Save this paper

Pricing of the Policy Life in Absence of Default Risk and Asset Liability Management

Author

Listed:
  • Giandomenico, Rossano

Abstract

The model, by using the option theory, determines the fair value of the life insurance policies in absence of default risk and shows that the fair fixed guaranteed interest-rate is less than the risk free interest rate due to the exchange of options between policyholders and shareholders. Furthermore, it shows that the effective liabilities duration is different from the duration of a default free zero coupon bond with the same time of maturity such that the equity value is immunized by using a perfect hedge ratio.

Suggested Citation

  • Giandomenico, Rossano, 2006. "Pricing of the Policy Life in Absence of Default Risk and Asset Liability Management," MPRA Paper 18844, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:18844
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/18844/1/MPRA_paper_18844.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. David Babbel & Craig Merrill, 1998. "Economic Valuation Models for Insurers," North American Actuarial Journal, Taylor & Francis Journals, vol. 2(3), pages 1-15.
    2. Geske, Robert, 1979. "The valuation of compound options," Journal of Financial Economics, Elsevier, vol. 7(1), pages 63-81, March.
    3. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    4. David Heath & Robert Jarrow & Andrew Morton, 2008. "Bond Pricing And The Term Structure Of Interest Rates: A New Methodology For Contingent Claims Valuation," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 13, pages 277-305, World Scientific Publishing Co. Pte. Ltd..
    5. Giandomenico, Rossano, 2006. "Valuing an American Put Option," MPRA Paper 20082, University Library of Munich, Germany.
    6. Geske, Robert & Johnson, Herb E, 1984. "The American Put Option Valued Analytically," Journal of Finance, American Finance Association, vol. 39(5), pages 1511-1524, December.
    7. Vasicek, Oldrich Alfonso, 1977. "Abstract: An Equilibrium Characterization of the Term Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(4), pages 627-627, November.
    8. Giandomenico, Rossano, 2006. "Martingale Model," MPRA Paper 21973, University Library of Munich, Germany.
    9. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    10. Giandomenico, Rossano, 2006. "Asset Liability Management in Insurance Company," MPRA Paper 16333, University Library of Munich, Germany, revised Jan 2009.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Giandomenico, Rossano, 2014. "Finance & Stochastic," MPRA Paper 71627, University Library of Munich, Germany.
    2. Giandomenico, Rossano, 2006. "Asset Liability Management in Insurance Company," MPRA Paper 16333, University Library of Munich, Germany, revised Jan 2009.
    3. Rossano Giandomenico, 2011. "Asset Liability Management for Banks," The IUP Journal of Bank Management, IUP Publications, vol. 0(4), pages 31-46, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rossano Giandomenico, 2011. "Asset Liability Management for Banks," The IUP Journal of Bank Management, IUP Publications, vol. 0(4), pages 31-46, November.
    2. Giandomenico, Rossano, 2006. "Asset Liability Management in Insurance Company," MPRA Paper 16333, University Library of Munich, Germany, revised Jan 2009.
    3. Bjork, Tomas, 2009. "Arbitrage Theory in Continuous Time," OUP Catalogue, Oxford University Press, edition 3, number 9780199574742.
    4. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    5. Suresh M. Sundaresan, 2000. "Continuous‐Time Methods in Finance: A Review and an Assessment," Journal of Finance, American Finance Association, vol. 55(4), pages 1569-1622, August.
    6. Mondher Bellalah, 2009. "Derivatives, Risk Management & Value," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 7175.
    7. Carl Chiarella & Xue-Zhong He & Christina Sklibosios Nikitopoulos, 2015. "Derivative Security Pricing," Dynamic Modeling and Econometrics in Economics and Finance, Springer, edition 127, number 978-3-662-45906-5, July-Dece.
    8. Samuel Chege Maina, 2011. "Credit Risk Modelling in Markovian HJM Term Structure Class of Models with Stochastic Volatility," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2011.
    9. Samuel Chege Maina, 2011. "Credit Risk Modelling in Markovian HJM Term Structure Class of Models with Stochastic Volatility," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 5, July-Dece.
    10. Mark Broadie & Jerome B. Detemple, 2004. "ANNIVERSARY ARTICLE: Option Pricing: Valuation Models and Applications," Management Science, INFORMS, vol. 50(9), pages 1145-1177, September.
    11. Snorre Lindset & Arne-Christian Lund, 2007. "A Technique for Reducing Discretization Bias from Monte Carlo Simulations: Option Pricing under Stochastic Interest Rates," The European Journal of Finance, Taylor & Francis Journals, vol. 13(6), pages 545-564.
    12. João Nunes, 2011. "American options and callable bonds under stochastic interest rates and endogenous bankruptcy," Review of Derivatives Research, Springer, vol. 14(3), pages 283-332, October.
    13. Antonio Mele, 2003. "Fundamental Properties of Bond Prices in Models of the Short-Term Rate," The Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 679-716, July.
    14. Fergusson, Kevin, 2020. "Less-Expensive Valuation And Reserving Of Long-Dated Variable Annuities When Interest Rates And Mortality Rates Are Stochastic," ASTIN Bulletin, Cambridge University Press, vol. 50(2), pages 381-417, May.
    15. Chang, Chuang-Chang, 2001. "Efficient procedures for the valuation and hedging of American currency options with stochastic interest rates," Journal of Multinational Financial Management, Elsevier, vol. 11(3), pages 241-268, July.
    16. Ako Doffou & Jimmy E. Hilliard, 2001. "Pricing Currency Options Under Stochastic Interest Rates And Jump-Diffusion Processes," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 24(4), pages 565-585, December.
    17. repec:uts:finphd:40 is not listed on IDEAS
    18. Kristensen, Dennis, 2008. "Estimation of partial differential equations with applications in finance," Journal of Econometrics, Elsevier, vol. 144(2), pages 392-408, June.
    19. Eichler, Stefan & Karmann, Alexander & Maltritz, Dominik, 2011. "The term structure of banking crisis risk in the United States: A market data based compound option approach," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 876-885, April.
    20. Duffie, Darrell, 2003. "Intertemporal asset pricing theory," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 11, pages 639-742, Elsevier.
    21. Zhiwu Chen & Gurdip Bakshi, 2001. "Stock Valuation in Dynamic Economics," Yale School of Management Working Papers ysm198, Yale School of Management.

    More about this item

    Keywords

    Contingent Claim; Duration;

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:18844. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.