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Worst-Case Valuation of Equity-Linked Products Using Risk-Minimizing Strategies

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  • Patrice Gaillardetz
  • Emmanuel Osei Mireku

Abstract

The impact of model risk when hedging equity-linked products and other investment guarantees is significant. We propose a model to determine the worst-case value of an equity-linked product through partial hedging. Risk control strategies based on conditional Value at Risk measures are used. The model integrates both mortality and financial risk associated with these products to find the worst-case value. We adopt robust optimization techniques to compute an optimal hedging strategy. To demonstrate versatility of the framework, numerical examples of point-to-point equity-indexed annuities are presented in multinomial lattice dynamics. We compare robustness of the model to super-replicating and quadratic hedging strategies by computing their capital requirements.

Suggested Citation

  • Patrice Gaillardetz & Emmanuel Osei Mireku, 2022. "Worst-Case Valuation of Equity-Linked Products Using Risk-Minimizing Strategies," North American Actuarial Journal, Taylor & Francis Journals, vol. 26(1), pages 64-81, January.
    • Handle: RePEc:taf:uaajxx:v:26:y:2022:i:1:p:64-81
    DOI: 10.1080/10920277.2020.1826975
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    Cited by:

    1. Jaume Belles-Sampera & Montserrat Guillen & Miguel Santolino, 2023. "Haircut Capital Allocation as the Solution of a Quadratic Optimisation Problem," Mathematics, MDPI, vol. 11(18), pages 1-17, September.

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