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A Bivariate Lattice Model to Compute Risk Measures in Life Insurance Policies

Massimo Costabile
The Journal of Derivatives Spring 2021, jod.2020.1.117; DOI: https://doi.org/10.3905/jod.2020.1.117
Massimo Costabile
is a professor in the Department of Economics, Statistics and Finance at the University of Calabria in Rende, Italy
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Abstract

We consider the problem of computing risk measures in a life insurance context by means of a lattice-based approach. The main advantage of the proposed model relies on the fact that the dynamics of the risk factors may be approximated by a unique lattice along the whole time horizon, thus guaranteeing the same computational cost of a standard pricing problem. This allows us to develop an efficient model that computes accurate estimates of the considered risk measures.

TOPICS: Risk management, derivatives, options, equity portfolio management

Key Findings

  • ▪ This article shows how lattice-based models can be used to evaluate risk measures of life insurance contract.

  • ▪ A bivariate lattice is constructed to approximate the loss function of an equity-linked policy with or without mortality risk.

  • ▪ Numerical results show that the model computes accurate Value at Risk and Conditional Value at Risk values in all the considered cases.

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The Journal of Derivatives: 28 (2)
The Journal of Derivatives
Vol. 28, Issue 2
Winter 2020
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A Bivariate Lattice Model to Compute Risk Measures in Life Insurance Policies
Massimo Costabile
The Journal of Derivatives Nov 2020, jod.2020.1.117; DOI: 10.3905/jod.2020.1.117

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A Bivariate Lattice Model to Compute Risk Measures in Life Insurance Policies
Massimo Costabile
The Journal of Derivatives Nov 2020, jod.2020.1.117; DOI: 10.3905/jod.2020.1.117
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  • Article
    • Abstract
    • THE BIVARIATE APPROXIMATING LATTICE MODEL
    • VAR AND CVAR OF AN EQUITY-LINKED POLICY WITH MATURITY GUARANTEE
    • NUMERICAL RESULTS
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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