TY - JOUR
T1 - Efficient valuation of guaranteed minimum maturity benefits in regime switching jump diffusion models with surrender risk
AU - Zhong, Wei
AU - Cui, Zhenyu
AU - Zhang, Zhimin
N1 - Publisher Copyright:
© 2022 Elsevier B.V.
PY - 2023/4
Y1 - 2023/4
N2 - 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.
AB - 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.
KW - Continuous-time Markov chain
KW - GMMB
KW - Regime-switching jump diffusion model
KW - Surrender risk
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U2 - 10.1016/j.cam.2022.114914
DO - 10.1016/j.cam.2022.114914
M3 - Article
AN - SCOPUS:85141509888
SN - 0377-0427
VL - 422
JO - Journal of Computational and Applied Mathematics
JF - Journal of Computational and Applied Mathematics
M1 - 114914
ER -