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dc.contributor.author | Levendis, Alexis Jacques![]() |
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dc.contributor.author | Mare, Eben![]() |
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dc.date.accessioned | 2023-10-16T06:33:37Z | |
dc.date.available | 2023-10-16T06:33:37Z | |
dc.date.issued | 2022 | |
dc.description.abstract | It is well known that interest rate risk is a dominating factor when pricing long-dated contingent claims. The Heston stochastic volatility model fails to capture this risk as the model assumes a constant interest rate throughout the life of the claim. To overcome this, the risk-free interest rate can be modelled by a Hull-White short rate process and can be combined with the Heston stochastic volatility model to form the so-called Heston-Hull-White model. The Heston-Hull-White model allows for correlation between the equity and interest rate processes, a component that is important when pricing long-dated contingent claims. In this paper, we apply the Heston-Hull-White model to price Guaranteed Minimum Maturity Benefits (GMMBs) and Guaranteed Minimum Death Benefits (GMDBs) offered in the life insurance industry in South Africa. We propose a further extension by including stochastic mortality rates based on either a continuous-time Cox-Ingersoll-Ross short rate process or a discrete-time AR(1)-ARCH(1) model. Our findings suggest that stochastic interest rates are the dominating factor when reserving for GMMB and GMDB products. Furthermore, a delta-hedging strategy can help reduce the variability of embedded derivative liabilities. | en_US |
dc.description.department | Insurance and Actuarial Science | en_US |
dc.description.department | Mathematics and Applied Mathematics | en_US |
dc.description.librarian | am2023 | en_US |
dc.description.uri | https://www.actuarialsociety.org.za/assa-news/sa-actuarial-journal-and-articles | en_US |
dc.identifier.citation | Levendis, A. & Mare, E. 2022, 'An economic scenario generator for embedded derivatives in South Africa', South African Actuarial Journal, vol. 22, pp. 79-118. DOI; 10.4314/saaj.v22i1.4 | en_US |
dc.identifier.issn | 1680-2179 | |
dc.identifier.other | 10.4314/saaj.v22i1.4 | |
dc.identifier.uri | http://hdl.handle.net/2263/92866 | |
dc.language.iso | en | en_US |
dc.publisher | Actuarial Society of South Africa | en_US |
dc.rights | © Actuarial Society of South Africa. This work is distributed under the Creative Commons Attribution 3.0 License. | en_US |
dc.subject | Heston-Hull-White | en_US |
dc.subject | Stochastic volatility | en_US |
dc.subject | Stochastic interest rates | en_US |
dc.subject | Stochastic mortality | en_US |
dc.subject | Pricing | en_US |
dc.subject | Hedging | en_US |
dc.subject | Guaranteed minimum death benefit (GMDB) | en_US |
dc.subject | Guaranteed minimum maturity benefit (GMMB) | en_US |
dc.title | An economic scenario generator for embedded derivatives in South Africa | en_US |
dc.type | Article | en_US |