Applications of time-delayed backward stochastic differential equations to pricing, hedging and portfolio management in insurance and finance

Volume 39 / 2012

Łukasz Delong Applicationes Mathematicae 39 (2012), 463-488 MSC: Primary 49N90, 60H30; Secondary 60G99. DOI: 10.4064/am39-4-5

Abstract

We investigate novel applications of a new class of equations which we call time-delayed backward stochastic differential equations. Time-delayed BSDEs may arise in insurance and finance in an attempt to find an investment strategy and an investment portfolio which should replicate a liability or meet a target depending on the strategy applied or the past values of the portfolio. In this setting, a managed investment portfolio serves simultaneously as the underlying security on which the liability/target is contingent and as a replicating portfolio for that liability/target. This is usually the case of capital-protected investments and performance-linked pay-offs. We give examples of pricing, hedging and portfolio management problems (asset-liability management problems) which could be investigated in the framework of time-delayed BSDEs. We focus on participating contracts and variable annuities. We believe that time-delayed BSDEs could offer a tool for studying investment life insurance contracts from a new and desirable perspective.

Authors

  • Łukasz DelongInstitute of Econometrics
    Warsaw School of Economics
    Al. Niepodległości 162
    02-554 Warszawa, Poland
    e-mail

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