VIX-linked GMMB under affine GARCH models and its Diffusion Limits
Date
2018-07-06
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Abstract
In variable annuity (VA) industry, to compensate for the liability coming from embedded riders in VA, insurer usually charge a fixed percentage of investment fund as the riders fee. However, the traditional fixed-fee structure would misalign insurer’s income and liability and in consequence cause risk management challenges for insurer. In 2013, the Chicago Board of Options Exchange (CBOE) suggests linking riders fee in variable annuity with VIX index in a white paper and shows that VIX-linked fee structure can help to re-align insurer’s income and liability using non-parametric models. Affine GARCH models are used in this work to analyze VIX-linked fee structure for VA with guarantee minimum maturity benefit (GMMB). A closed-form solution to GMMB has been derived and is used to determine a fair fee structure. Comparison between fixed-fee structure and VIX-linked fee structure has been been shown by numerical examples.
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Keywords
Variable annuity, VIX-linked fee, GMMB, affine GARCH models, closed-form solution, diffusion limits
Citation
Chen, Y. (2018). VIX-linked GMMB under affine GARCH models and its Diffusion Limits (Master's thesis, University of Calgary, Calgary, Canada). Retrieved from https://prism.ucalgary.ca. doi:10.11575/PRISM/32341