Investment Guarantees. Modeling and Risk Management for by Mary Hardy

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By Mary Hardy

Funding promises conscientiously pulls jointly the entire most up-to-date versions and techniques which are beneficial in coping with the chance linked to equity-linked assurance. choked with specialist insights and confirmed suggestions, this publication is a useful one-stop reference that would let you greater comprehend the idea and perform at the back of modeling and chance administration for equity-linked lifestyles assurance.

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In Chapter 7 we discuss the relationship between these two measures. There are some complications in applying this theory to the options embedded in equity-linked insurance. The major problem is the very longterm nature of the equity-linked options. The contract term for standard traded options might be a few weeks—an option with a term of more than six months would be considered long term. In contrast, the options implicit in equity-linked insurance commonly have terms of over 10 years, and some may be in force for 30 years or more.

ECONOMICAL THEORY OR STATISTICAL METHOD? Some models are derived from economic theory. For example, the efficient market hypothesis of economics states that if markets are efficient, then all information is equally available to all investors, and it should be impossible to make systematic profits relative to other investors. This is different from the no-arbitrage assumption, which states that it should be impossible to make risk-free profits. The efficient market hypothesis is consistent with the theory that prices follow a random walk, which is consistent with assuming returns on stocks are lognormally distributed.

The hypothesis is inconsistent with any process involving, for example, autoregression (a tendency for returns to move toward the mean). In an autoregressive market, it should be possible to make systematic profits by following a countercyclical investment strategy—that is, invest more when recent returns have been poor and disinvest when returns have been high, since the model assumes that returns will eventually move back toward the mean. The statistical approach to fitting time series data does not consider exogenous theories, but instead finds the model that “best fits” the data, 18 MODELING LONG-TERM STOCK RETURNS in some statistical sense.

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