On Fund Mapping Regressions Applied to Segregated Funds Hedging Schemes under Regime-Switching Dynamics

22 Pages Posted: 14 Apr 2018 Last revised: 21 Jul 2018

See all articles by Denis-Alexandre Trottier

Denis-Alexandre Trottier

Laval University, Faculté d'Administration, Département de Finance et Assurance, Students

Frédéric Godin

Concordia University, Quebec - Department of Mathematics & Statistics; Université Laval

Emmanuel Hamel

Laval University - Ecole d’Actuariat, Students

Date Written: March 16, 2018

Abstract

Insurers issuing segregated fund policies apply dynamic hedging to mitigate risks related to guarantees embedded in such policies. A typical industry practice consists in using fund mapping regressions to represent basis risk stemming from the imperfect correlation between the underlying fund and its corresponding hedging instruments. The current note discusses the implications of using fund mapping regressions in a regime-switching framework, such as the potential underestimation of capital requirements. The impact of the latter phenomenon is quantified through simulations calibrated on market data.

Keywords: Basis Risk, Hedging, Segregated Funds, Variable Annuities, Risk Measures, Risk Management, Regime-Switching Models

JEL Classification: G22, G31, G32, C61

Suggested Citation

Trottier, Denis-Alexandre and Godin, Frédéric and Hamel, Emmanuel, On Fund Mapping Regressions Applied to Segregated Funds Hedging Schemes under Regime-Switching Dynamics (March 16, 2018). Available at SSRN: https://ssrn.com/abstract=3155209 or http://dx.doi.org/10.2139/ssrn.3155209

Denis-Alexandre Trottier

Laval University, Faculté d'Administration, Département de Finance et Assurance, Students ( email )

Pavillon Palasis-Prince
Quebec, Quebec G1K 7P4
Canada

Frédéric Godin (Contact Author)

Concordia University, Quebec - Department of Mathematics & Statistics ( email )

1455 De Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

Université Laval ( email )

2214 Pavillon J-A. DeSeve
Quebec, Quebec G1K 7P4
Canada

Emmanuel Hamel

Laval University - Ecole d’Actuariat, Students ( email )

Canada

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