A Mixed Bond and Equity Fund Model for the Valuation of Segregated Fund Policies

43 Pages Posted: 12 Nov 2019

See all articles by Maciej Augustyniak

Maciej Augustyniak

University of Montreal - Department of Mathematics and Statistics

Frédéric Godin

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

Emmanuel Hamel

Laval University - Ecole d’Actuariat, Students

Date Written: October 26, 2019

Abstract

Segregated fund and variable annuity policies are typically issued on mutual funds invested in both fixed income and equity asset classes. However, due to the lack of specialized models to represent the dynamics of fixed income fund returns, the literature has primarily focused on studying long-term investment guarantees on single-asset equity funds. This article develops a mixed bond and equity fund model in which the fund return is linked to movements of the yield curve. Theoretical motivation for our proposed specification is provided through an analogy with a portfolio of rolling horizon bonds. Moreover, basis risk between the portfolio return and its risk drivers is naturally incorporated into our framework. Numerical results show that the fit of our model to segregated fund data is adequate. Finally, the valuation of segregated fund policies is illustrated and it is found that the interest rate environment can have a substantial impact on guarantee costs.

Keywords: mutual fund model, bond fund, yield curve, investment guarantee, variable annuities, basis risk

JEL Classification: G32, C51, C63

Suggested Citation

Augustyniak, Maciej and Godin, Frédéric and Hamel, Emmanuel, A Mixed Bond and Equity Fund Model for the Valuation of Segregated Fund Policies (October 26, 2019). Available at SSRN: https://ssrn.com/abstract=3479445 or http://dx.doi.org/10.2139/ssrn.3479445

Maciej Augustyniak (Contact Author)

University of Montreal - Department of Mathematics and Statistics ( email )

C.P. 6128, succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada

HOME PAGE: http://dms.umontreal.ca/

Frédéric Godin

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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