Pricing and hedging equity-linked life insurance contracts beyond the classical paradigm: The principle of equivalent forward preferences

Chong, Wing Fung

doi:10.1016/j.insmatheco.2019.06.003

Cited by 10 publications

(8 citation statements)

References 58 publications

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“…Let t 0 ≥ 0 be the forward normalization point. Then, the process {U t (x, t 0 ), t ≥ t 0 }, given for x ∈ R and t ≥ t 0 , by U t (x, t 0 ) = −e −γx+h(t 0 ,t) , (13) with the process {h(t 0 , t), t ≥ t 0 } defined in (11), is a forward dynamic exponential utility, normalized at t 0 .…”

Section: Forward Exponential Utility Preferencesmentioning

confidence: 99%

“…However, to the best of our knowledge, all these contributions only employ classical backward utilities preferences, see, e.g., Brachetta and Ceci [6], Cao et al [7], Ceci et al [8], Gu et al [9], Liu and Ma [10] and references therein. A recent application of the forward utility approach to insurance can be found in Chong [11], where an evaluation problem of equity-linked life insurance contracts is investigated.…”

Section: Introductionmentioning

confidence: 99%

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Optimal Investment and Proportional Reinsurance in a Regime-Switching Market Model under Forward Preferences

2021

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In this paper, we study the optimal investment and reinsurance problem of an insurance company whose investment preferences are described via a forward dynamic exponential utility in a regime-switching market model. Financial and actuarial frameworks are dependent since stock prices and insurance claims vary according to a common factor given by a continuous time finite state Markov chain. We construct the value function and we prove that it is a forward dynamic utility. Then, we characterize the optimal investment strategy and the optimal proportional level of reinsurance. We also perform numerical experiments and provide sensitivity analyses with respect to some model parameters.

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Section: Forward Exponential Utility Preferencesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Optimal Investment and Proportional Reinsurance in a Regime-Switching Market Model under Forward Preferences

2021

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“…Forward performance processes are an alternative performance criterion that can address these issues. Their continuous-time version was introduced in various forms in Musiela and Zariphopoulou (2006), Musiela and Zariphopoulou (2008), Musiela and Zariphopoulou (2009), Musiela and Zariphopoulou (2010), Henderson and Hobson (2007), Choulli et al (2007), Žitković (2009), andMrad (2013), and further developed in, for example, Avanesyan et al (2020), Chong (2019), Bo et al (2022), El Karoui et al (2014, El Karoui and Mrad (2021), He et al (2021), Hu et al (2020), Källblad et al (2018), Källblad (2020), Liang and Zariphopoulou (2017), Nadtochiy and Tehranchi (2017), and Shkolnikov et al (2016).…”

Section: Introductionmentioning

confidence: 99%

Predictable forward performance processes: Infrequent evaluation and applications to human‐machine interactions

Liang

Strub

Wang

2023

Mathematical Finance

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We study discrete‐time predictable forward processes when trading times do not coincide with performance evaluation times in a binomial tree model for the financial market. The key step in the construction of these processes is to solve a linear functional equation of higher order associated with the inverse problem driving the evolution of the predictable forward process. We provide sufficient conditions for the existence and uniqueness and an explicit construction of the predictable forward process under these conditions. Furthermore, we find that these processes are inherently myopic in the sense that optimal strategies do not make use of future model parameters even if these are known. Finally, we argue that predictable forward preferences are a viable framework to model human‐machine interactions occurring in automated trading or robo‐advising. For both applications, we determine an optimal interaction schedule of a human agent interacting infrequently with a machine that is in charge of trading.

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“…Related notions were developed and studied in Henderson and Hobson (2007) and El Karoui and Mohamed (2013); see also Bernard and Kwak (2016) and Choulli and Ma (2017). More recently, they have also been considered in discrete-time by Angoshtari et al (2020) and Strub and Zhou (2020), applied to problems arising in insurance by Chong (2019), extended to settings with model ambiguity in Källblad et al (2018) and Chong and Liang (2018), and applied to optimal contract theory in Nadtochiy and Zariphopoulou (2019). The main challenge to study forward performance processes is that the associated stochastic optimization problems are, in general, ill-posed as one assigns an initial utility and not a terminal one.…”

Section: Introductionmentioning

confidence: 99%

“…More recently, they have also been considered in discrete‐time by Angoshtari et al. (2020) and Strub and Zhou (2020), applied to problems arising in insurance by Chong (2019), extended to settings with model ambiguity in Källblad et al. (2018) and Chong and Liang (2018), and applied to optimal contract theory in Nadtochiy and Zariphopoulou (2019).…”

Section: Introductionmentioning

confidence: 99%

Forward rank‐dependent performance criteria: Time‐consistent investment under probability distortion

Strub

Zariphopoulou

2021

Mathematical Finance

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We introduce the concept of forward rank-dependent performance criteria, extending the original notion to forward criteria that incorporate probability distortions. A fundamental challenge is how to reconcile the timeconsistent nature of forward performance criteria with the time-inconsistency stemming from probability distortions. For this, we first propose two distinct definitions, one based on the preservation of performance value and the other on the time-consistency of policies and, in turn, establish their equivalence. We then fully characterize the viable class of probability distortion processes and provide the following dichotomy: it is either the case that the probability distortions are degenerate in the sense that the investor would never invest in the risky assets, or the marginal probability distortion equals to a normalized power of the quantile function of the pricing kernel. We also characterize the optimal wealth process, whose structure motivates the introduction of a new, 'distorted' measure and a related market. We then build a striking correspondence between the forward

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Pricing and hedging equity-linked life insurance contracts beyond the classical paradigm: The principle of equivalent forward preferences

Cited by 10 publications

References 58 publications

Optimal Investment and Proportional Reinsurance in a Regime-Switching Market Model under Forward Preferences

Optimal Investment and Proportional Reinsurance in a Regime-Switching Market Model under Forward Preferences

Predictable forward performance processes: Infrequent evaluation and applications to human‐machine interactions

Forward rank‐dependent performance criteria: Time‐consistent investment under probability distortion

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