Efficient valuation of guaranteed minimum maturity benefits in regime switching jump diffusion models with surrender risk

Wei Zhong, Zhenyu Cui, Zhimin Zhang

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

We present an efficient valuation approach for guaranteed minimum maturity benefits (GMMBs) embedded in variable annuity (VA) contracts in a regime-switching jump diffusion model. We allow early surrender of the VA contract and impose surrender charges, which are important in practice to discourage early termination/lapse of the contract. We consider both continuously-monitored and discretely-monitored surrender behaviors before maturity, and utilize an intensity-based framework. Based on the continuous-time Markov chain (CTMC) approximation combined with the Fourier cosine series expansion method, we find that the valuation problem can be solved under a regime-switching jump diffusion framework. Both error analysis and numerical experiments demonstrate the accuracy and efficiency of the proposed method.

Original languageEnglish
Article number114914
JournalJournal of Computational and Applied Mathematics
Volume422
DOIs
StatePublished - Apr 2023

Keywords

  • Continuous-time Markov chain
  • GMMB
  • Regime-switching jump diffusion model
  • Surrender risk

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