Pricing Guaranteed Annuity Options in a Linear-Rational Wishart Mortality Model
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Journal Article
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Elsevier BV
Abstract
This paper proposes a new model, the linear-rational Wishart model, which allows the joint modelling of mortality and interest rate risks. Within this framework, we obtain closed-form solutions for the survival bond and the survival floating rate bond. We also derive a closed-form solution for the guaranteed annuity option, i.e., an option on a sum of survival (floating rate) bonds, which can be computed explicitly up to a one-dimensional numerical integration, independent of the model dimension. Using realistic parameter values, we provide a model implementation for these complex derivatives that illustrates the flexibility and efficiency of the linear-rational Wishart model.Description
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4901 Applied Mathematics, 3502 Banking, Finance and Investment, 49 Mathematical Sciences, 35 Commerce, Management, Tourism and Services, 3 Good Health and Well Being, 01 Mathematical Sciences, 14 Economics, 15 Commerce, Management, Tourism and Services, Statistics & Probability, 35 Commerce, management, tourism and services, 38 Economics, 49 Mathematical sciences
Source
Insurance: Mathematics and Economics, ISSN: 0167-6687 (Print), Elsevier BV, 115, 122-131. doi: 10.1016/j.insmatheco.2024.01.004