Abstract

http://ssrn.com/abstract=899281
 
 

References (9)



 


 



Optimal Hedging Strategies for Multi-Period Guarantees in the Presence of Transaction Costs: A Stochastic Programming Approach


Stein-Erik Fleten


Norwegian University of Science and Technology (NTNU)

Snorre Lindset


Norwegian University of Science and Technology (NTNU) Norway

April 7, 2006

European Journal of Operational Research, Vol. 185, No. 3, pp. 1680-1689, 2008

Abstract:     
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.

Number of Pages in PDF File: 17

Keywords: multi-period guarantee, optimal hedging strategies, transaction costs, stochastic programming

JEL Classification: G13, G22, C61

Accepted Paper Series


Download This Paper

Date posted: May 3, 2006 ; Last revised: January 27, 2012

Suggested Citation

Fleten, Stein-Erik and Lindset, Snorre, Optimal Hedging Strategies for Multi-Period Guarantees in the Presence of Transaction Costs: A Stochastic Programming Approach (April 7, 2006). European Journal of Operational Research, Vol. 185, No. 3, pp. 1680-1689, 2008. Available at SSRN: http://ssrn.com/abstract=899281 or http://dx.doi.org/10.2139/ssrn.899281

Contact Information

Stein-Erik Fleten (Contact Author)
Norwegian University of Science and Technology (NTNU) ( email )
NO-7491 Trondheim
Norway
HOME PAGE: http://www.iot.ntnu.no/users/fleten
Snorre Lindset
Norwegian University of Science and Technology (NTNU) Norway ( email )
NO-7491 Trondheim
Norway
Feedback to SSRN


Paper statistics
Abstract Views: 528
Downloads: 123
Download Rank: 133,535
References:  9

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo5 in 0.312 seconds