TY - JOUR
T1 - Variable Annuities with VIX-Linked Fee Structure under a Heston-Type Stochastic Volatility Model
AU - Cui, Zhenyu
AU - Feng, Runhuan
AU - MacKay, Anne
N1 - Publisher Copyright:
© 2017, Copyright © Society of Actuaries.
PY - 2017/7/3
Y1 - 2017/7/3
N2 - The Chicago Board of Options Exchange (CBOE) advocates linking variable annuity (VA) fees to its trademark VIX index in a recent white paper. It claims that the VIX-linked fee structure has several advantages over the traditional fixed percentage fee structure. However, the evidence presented is largely based on nonparametric extrapolation of historical data on market prices. Our work lays out a theoretical basis with a parametric model to analyze the impact of the VIX-linked fee structure and to verify some claims from the CBOE. In a Heston-type stochastic volatility setting, we jointly model the dynamics of an equity index (underlying the value of VA policyholders’ accounts) and the VIX index. In this framework, we price a guaranteed minimum maturity benefit with VIX-linked fees. Through numerical examples, we show that the VIX-linked fee reduces the sensitivity of the insurer's liability to market volatility when compared to a VA with the traditional fixed fee rate.
AB - The Chicago Board of Options Exchange (CBOE) advocates linking variable annuity (VA) fees to its trademark VIX index in a recent white paper. It claims that the VIX-linked fee structure has several advantages over the traditional fixed percentage fee structure. However, the evidence presented is largely based on nonparametric extrapolation of historical data on market prices. Our work lays out a theoretical basis with a parametric model to analyze the impact of the VIX-linked fee structure and to verify some claims from the CBOE. In a Heston-type stochastic volatility setting, we jointly model the dynamics of an equity index (underlying the value of VA policyholders’ accounts) and the VIX index. In this framework, we price a guaranteed minimum maturity benefit with VIX-linked fees. Through numerical examples, we show that the VIX-linked fee reduces the sensitivity of the insurer's liability to market volatility when compared to a VA with the traditional fixed fee rate.
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U2 - 10.1080/10920277.2017.1307765
DO - 10.1080/10920277.2017.1307765
M3 - Article
AN - SCOPUS:85021884531
SN - 1092-0277
VL - 21
SP - 458
EP - 483
JO - North American Actuarial Journal
JF - North American Actuarial Journal
IS - 3
ER -