The effect of modelling parameters on the value of GMWB guarantees
In this article, an extensive study of the no-arbitrage fee for Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuity riders is carried out. The value of the GMWB guarantee increases substantially when taking into account the separation of mutual fund fees and the fees earmarked for hedging the guarantee. In addition, the fee is also adversely affected if the underlying risky asset follows a jump diffusion process. We also explore the effects of various modelling assumptions on the optimal withdrawal strategy of the contract holder, as well as the impact on the guarantee value of sub-optimal withdrawal behaviour. Our general conclusions are that only if several unrealistic modelling assumptions are made is it possible to obtain GMWB fees in the same range as is normally charged. In all other cases, it would appear that typical fees are not enough to cover the cost of hedging these guarantees.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Milevsky, Moshe A. & Salisbury, Thomas S., 2006. "Financial valuation of guaranteed minimum withdrawal benefits," Insurance: Mathematics and Economics, Elsevier, vol. 38(1), pages 21-38, February.
- C. He & J. Kennedy & T. Coleman & P. Forsyth & Y. Li & K. Vetzal, 2006. "Calibration and hedging under jump diffusion," Review of Derivatives Research, Springer, vol. 9(1), pages 1-35, January.
- Leif Andersen & Jesper Andreasen, 2000. "Jump-Diffusion Processes: Volatility Smile Fitting and Numerical Methods for Option Pricing," Review of Derivatives Research, Springer, vol. 4(3), pages 231-262, October.
- Windcliff, H. & Forsyth, P. A. & Vetzal, K. R., 2001. "Valuation of segregated funds: shout options with maturity extensions," Insurance: Mathematics and Economics, Elsevier, vol. 29(1), pages 1-21, August.
- Min Dai & Yue Kuen Kwok & Jianping Zong, 2008. "Guaranteed Minimum Withdrawal Benefit In Variable Annuities," Mathematical Finance, Wiley Blackwell, vol. 18(4), pages 595-611.
When requesting a correction, please mention this item's handle: RePEc:eee:insuma:v:43:y:2008:i:1:p:165-173. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If references are entirely missing, you can add them using this form.