|edoc-Server der Humboldt-Universität zu Berlin|
Stein-Erik Fleten, Norwegian University of Science and Technology|
Snorre Lindset, Trondheim Business School
|Title:||Optimal Hedging Strategies for Multi-period Guarantees in the Presence of Transaction Costs: A Stochastic Programming Approach|
|Date of Acceptance:||18.10.2006|
Stochastic Programming E-Print Series |
|Editors:||Julie L. Higle; Werner Römisch; Surrajeet Sen|
|Appeared in:||European J. of Operational Research 185 (Vol. 3, 2008)|
|Metadata export: To export the complete metadata set as Endote or Bibtex format please click to the appropriate link.||Endnote Bibtex|
|Multi-period guarantees are often embedded in life insurance contracts. In this paper we consider the problem of hedging these multi-period guarantees in the presence of transaction costs. We derive the hedging strategies for the cheapest hedge portfolio for a multi-period guarantee that with certainty makes the insurance company able to meet the obligations from the insurance policies it has issued. We find that by imposing transaction costs, the insurance company reduces the rebalancing of the hedge portfolio. The cost of establishing the hedge portfolio also increases as the transaction cost increases. For the multi-period guarantee there is a rather large rebalancing of the hedge portfolio as we go from one period to the next. By introducing transaction costs we find the size of this rebalancing to be reduced. Transaction costs may therefore be one possible explanation for why we do not see the insurance companies performing a large rebalancing of their investment portfolio at the end of each year.|
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