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Hedging life insurance contracts in a Lévy process financial market

Authors
Journal
Insurance Mathematics and Economics
0167-6687
Publisher
Elsevier
Publication Date
Volume
38
Issue
3
Identifiers
DOI: 10.1016/j.insmatheco.2005.12.004
Keywords
  • Unit-Linked Life Insurance
  • Lévy Process
  • Incomplete Market
  • Risk-Minimization
  • Martingale Representation
  • Kunita–Watanabe

Abstract

Abstract Starting from the model of Møller [Risk-minimizing hedging strategies for unit-linked life insurance contracts. ASTIN Bulletin 28 (1998) 17–47] we derive analogously, but for an incomplete financial market, a (locally) risk-minimizing hedging strategy for unit-linked life insurance contracts represented by the pure endowment and the term insurance. The incomplete financial market is exemplarily given by a general Lévy-driven model. We investigate the Föllmer–Schweizer decomposition of their intrinsic value. Additionally, we compare our results to the ones obtained by Møller [Risk-minimizing hedging strategies for unit-linked life insurance contracts. ASTIN Bulletin 28 (1998) 17–47] and show how they are affected by replacing the complete financial market by an incomplete one.

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