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• W185650075 abstract "Pricing and Hedging Equity-Linked Products Under Stochastic Volatility Models Anne MacKay Equity-indexed annuities (EIAs) are becoming increasingly interesting for investors as market volatility increases. Simultaneously, they represent a higher risk for insurers, which amplifies the need for hedging strategies that perform well when index returns present unexpected changes in their volatility. In this thesis, we introduce hedging strategies that aim at reducing the risk of the financial guarantees embedded in EIAs. We first derive closed-form expressions for the price and the Greeks of a point-topoint EIA under the Heston model, which assumes stochastic volatility. To do so, we rely on the similarity between the payoff of a European call option and that of the EIA. We use the Greeks to develop dynamic hedging strategies that aim at reducing equity and volatility risk. Using Monte Carlo simulations to derive the distribution of the resulting hedging errors, we compare the performance of hedging strategies that use the Greeks derived under the Heston model to other strategies based on Greeks developed under Black-Scholes. We show that, when the market is Hestonian, the performance of hedging strategies developed in a Black-Scholes framework are significantly affected by the calibration of the model and the volatility risk premium. We further show that the performance of a simple delta hedging strategy using Heston Greeks is also reduced by the presence of a iii volatility risk premium, and that this performance can be improved by incorporating gamma or vega hedging to the strategy. We conclude by recommending the use of a delta-vega hedging strategy to reduce model calibration and volatility risk." @default.
• W185650075 created "2016-06-24" @default.
• W185650075 creator A5088741796 @default.
• W185650075 date "2011-08-01" @default.
• W185650075 modified "2023-09-26" @default.
• W185650075 title "Pricing and Hedging Equity-Linked Products under Stochastic Volatility Models" @default.
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• W185650075 hasPublicationYear "2011" @default.
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