EFFICIENT HEDGING FOR DEFAULTABLE SECURITIES AND ITS APPLICATION TO EQUITY-LINKED LIFE INSURANCE CONTRACTS

EFFICIENT HEDGING FOR DEFAULTABLE SECURITIES AND ITS APPLICATION TO EQUITY-LINKED LIFE INSURANCE CONTRACTS

The paper deals with efficient hedging problem for defaultable securities with multiple default times and nonzero recovery rates. First, we convert the efficient hedging problem into a Neyman–Pearson problem with composite hypothesis against a simple alternative. Then we apply nonsmooth convex duali...

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Veröffentlicht in:International journal of theoretical and applied finance 2015-11, Vol.18 (7), p.1550047
Hauptverfasser: MELNIKOV, ALEXANDER, NOSRATI, AMIR
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NOSRATI, AMIR
description The paper deals with efficient hedging problem for defaultable securities with multiple default times and nonzero recovery rates. First, we convert the efficient hedging problem into a Neyman–Pearson problem with composite hypothesis against a simple alternative. Then we apply nonsmooth convex duality to provide a solution in the framework of a “defaultable” Black–Scholes model. Moreover, in the case of zero recovery rates, we find a closed form solution for the problem. As an application, it is shown how to use such type of results in pricing equity-linked life insurance contracts. The results are also demonstrated by some numerical examples.
doi_str_mv 10.1142/S0219024915500478
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title EFFICIENT HEDGING FOR DEFAULTABLE SECURITIES AND ITS APPLICATION TO EQUITY-LINKED LIFE INSURANCE CONTRACTS
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