Stochastic evaluation of life insurance contracts: Model point on asset trajectories and measurement of the error related to aggregation
In this paper,11Version of 2012/07/08. we are interested in the optimization of computing time when using Monte-Carlo simulations for the pricing of the embedded options in life insurance contracts. We propose a very simple method which consists in grouping the trajectories of the initial process of the asset according to a quantile. The measurement of the distance between the initial process and the discretized process is realized by the L2-norm. L2 distance decreases according to the number of trajectories of the discretized process. The discretized process is then used in the valuation of the life insurance contracts. We note that a wise choice of the discretized process enables us to correctly estimate the price of a European option. Finally, the error due to the valuation of a contract in Euro using the discretized process can be reduced to less than 5%.
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Volume (Year): 51 (2012)
Issue (Month): 3 ()
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- Michael B. Gordy & Sandeep Juneja, 2010.
"Nested Simulation in Portfolio Risk Measurement,"
INFORMS, vol. 56(10), pages 1833-1848, October.
- Michael B. Gordy & Sandeep Juneja, 2008. "Nested simulation in portfolio risk measurement," Finance and Economics Discussion Series 2008-21, Board of Governors of the Federal Reserve System (U.S.).
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