Cross-hedging minimum return guarantees: Basis and liquidity risks
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In: Journal of Economic Dynamics and Control, Vol. 41, 04.2014, p. 93-109.
Research output: Journal contributions › Journal articles › Research › peer-review
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TY - JOUR
T1 - Cross-hedging minimum return guarantees
T2 - Basis and liquidity risks
AU - Ankirchner, Stefan
AU - Schneider, Judith C.
AU - Schweizer, Nikolaus
PY - 2014/4
Y1 - 2014/4
N2 - We reveal pitfalls in the hedging of insurance contracts with a minimum return guarantee on the underlying investment, e.g. an external mutual fund. We analyze basis risk entailed by hedging the guarantee with a dynamic portfolio of proxy assets for the funds. We also take account of liquidity risk which arises since the insurer may need to advance funds for performing the hedge. Based on a least-squares Monte Carlo simulation, we study the economic implications of basis and liquidity risks. We demonstrate that both risks may be surprisingly high and show how the design of the contract and the hedging strategy may help to alleviate them.
AB - We reveal pitfalls in the hedging of insurance contracts with a minimum return guarantee on the underlying investment, e.g. an external mutual fund. We analyze basis risk entailed by hedging the guarantee with a dynamic portfolio of proxy assets for the funds. We also take account of liquidity risk which arises since the insurer may need to advance funds for performing the hedge. Based on a least-squares Monte Carlo simulation, we study the economic implications of basis and liquidity risks. We demonstrate that both risks may be surprisingly high and show how the design of the contract and the hedging strategy may help to alleviate them.
KW - Basis risk
KW - Least-squares monte carlo
KW - Liquidity risk
KW - Periodic premia
KW - Variable annuities
KW - Management studies
UR - http://www.scopus.com/inward/record.url?scp=84897524746&partnerID=8YFLogxK
UR - https://www.mendeley.com/catalogue/a594518c-4903-3c11-bb84-6ce69d6c3439/
U2 - 10.1016/j.jedc.2014.02.010
DO - 10.1016/j.jedc.2014.02.010
M3 - Journal articles
AN - SCOPUS:84897524746
VL - 41
SP - 93
EP - 109
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
SN - 0165-1889
ER -