NDLI: Hedging of Variable Annuities under Basis Risk

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Hedging of Variable Annuities under Basis Risk

Content Provider	Scilit
Author	Bauer, Jan
Copyright Year	2020
Abstract	I study dynamic hedging for variable annuities under basis risk. Basis risk, which arises from the imperfect correlation between the underlying fund and the proxy asset used for hedging, has a highly negative impact on the hedging performance. In this paper, I model the financial market based on correlated geometric Brownian motions and analyze the risk management for a pool of stylized GMAB contracts. I investigate whether the choice of a suitable hedging strategy can help to reduce the risk for the insurance company. Comparing several cross-hedging strategies, I observe very similar hedging performances. Particularly, I find that well-established but complex strategies from mathematical finance do not outperform simple and naive approaches in the context studied. Diversification, however, could help to reduce the adverse impact of basis risk.
Related Links	https://www.degruyter.com/downloadpdf/journals/apjri/ahead-of-print/article-10.1515-apjri-2019-0040/article-10.1515-apjri-2019-0040.pdf
ISSN	17932157
e-ISSN	21533792
DOI	10.1515/apjri-2019-0040
Journal	Asia-Pacific Journal of Risk and Insurance
Issue Number	2
Volume Number	14
Language	English
Publisher	Walter de Gruyter GmbH
Publisher Date	2020-08-08
Access Restriction	Open
Subject Keyword	Asia-pacific Journal of Risk and Insurance Finance Basis Risk Hedging Variable Annuities Gmab G13 G22 G32 Journal: Asia-Pacific Journal of Risk and Insurance, Vol- 14
Content Type	Text
Resource Type	Article

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