An efficient algorithm for the valuation of a guaranteed annuity option with correlated financial and mortality risks

作者：Zhao Yixing; Mamon Rogemar^*

来源：Insurance: Mathematics and Economics , 2018, 78: 1-12.

DOI：10.1016/j.insmatheco.2017.09.001

• Comonotonicity
• CIR interest-rate model
• Lee-Carter mortality model
• Change of probability measure
• Annuity-linked derivatives

We introduce a pricing framework for a guaranteed annuity option (GAO) where both the interest and mortality risks are correlated. We assume that the short rate and the force of mortality follow the Cox Ingersoll-Ross (CIR) and Lee-Carter models, respectively. Employing the change of measure technique, we decompose the pure endowment into the product of the bond price and survival probability, thereby facilitating the evaluation of the annuity expression. With the aid of the dynamics of interest and mortality processes under the forward measure, we construct an algorithm based on comonotonicity theory to estimate the quantiles of survival probability and annuity rate. The comonotonic upper and lower bounds in the convex order are used to approximate the annuity and GAO prices and henceforth avoiding the simulation-within-simulation problem. Numerical illustrations show that our algorithm gives an efficient and practical method to estimate GAO values.

• 出版日期2018-1