Embedded options and interest rate risk for insurance companies, banks and other financial institutions

Lee, Jaeha; Stock, Duane

doi:10.1016/s1062-9769(99)00057-5

Cited by 20 publications

(23 citation statements)

References 14 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…Song (1994), and Elyasiani and Mansur (1998, 2003, reach similar conclusions using ARCH and GARCH methodologies. Studies of interest rate sensitivity of the LICs, e.g., Brewer et al (1993), Lee and Stock (2000), Brewer et al (2007), also support the use of long-term interest rates.…”

Section: Interest Rate and Real-estate Return Sensitivitymentioning

confidence: 95%

Real-Estate Risk Effects on Financial Institutions’ Stock Return Distribution: a Bivariate GARCH Analysis

Elyasiani

Mansur

Wetmore

2008

J Real Estate Finan Econ

View full text Add to dashboard Cite

show abstract

Section: Interest Rate and Real-estate Return Sensitivitymentioning

confidence: 95%

Real-Estate Risk Effects on Financial Institutions’ Stock Return Distribution: a Bivariate GARCH Analysis

Elyasiani

Mansur

Wetmore

2008

J Real Estate Finan Econ

View full text Add to dashboard Cite

show abstract

“…According to the property of the probability, we could infer that Prob(Δr×A×D GAP >W)≤Prob(Δr×A×D GAP >Δr α ×A ×D GAP ) (14) We can get (8) by taking (11) into (14) ,when the condition Prob(Δr×A×D GAP >W)≤α is established. It shows that the inequality of (12) that occurs under the condition of prepared positive gap, could take place of the prepared gap controlling constraints (8), which is based on VaR technique.…”

Section: D)linear Constraints Take Place Of Var Constraintsmentioning

confidence: 99%

“…(2) Asset-liability Management based on controlling Interest Rate Risk with Embedded Option [8][9][10].…”

Section: Introductionmentioning

confidence: 99%

Assets and Liabilities Management Optimal Model Based on VaR Controlled Prepared Duration Gap

Yan

Chi

2009

2009 International Joint Conference on Computational Sciences and Optimization

View full text Add to dashboard Cite

We build an assets-liabilities management optimal model which controls VaR after the change of the interest rate and targets the maximum profit on assets portfolio. One of the contributions is to increase the net value of the bank through prepared duration gap when the interest rate is changing favorably, this is in turn offset the shortcoming of the current research which could not increase the net value when the gap is zero. The second is the prepared gap is controlled by VaR. The loss is controlled under a limit which is the monthly net interest income of the bank, while the interest rate changing adversely, this in turn protects the owner's equity of the bank. We use seven-day's reacquired interest rate data to estimate the frequency distribution of the fluctuation of the future market rate and solved the problem to describe the fluctuation of the interest rate with multi-factors.

show abstract

“…Ballotta [4], Lee and Stock [22], Wang, Gerrard and Haberman [30] have pointed out the importance of considering interest rate risks in the VA products with embedded options, however this risk has not been analyzed in context of GWB like products which are primarily equity based.…”

Section: Approach Findings and Contributionsmentioning

confidence: 99%

“…where the functions l(·), g(·) and the various parameters in the formulae are given in (17), (18) and (19)- (22). Since there are no cash outflows involved in phase 1 or during the waiting period, when the investor does not withdraw, it follows that, if I t denotes the indicator variable that the investor is alive at time t, then…”

Section: Value Of Cashflows At Inception (Time 0)mentioning

confidence: 99%

An Analysis of the Guaranteed Withdrawal Benefits for Life Option

Shah

Bertsimas

2008

SSRN Journal

View full text Add to dashboard Cite

In this paper, we present an analysis of the "Guaranteed Withdrawal Benefits" (GWB) for life option, a recent and popular product that many insurance companies are offering as a retirement planning solution.Under the GWB for life plan, the investor is promised increasing withdrawals during retirement for her lifetime, while still being invested in the markets. GWB for life thus transfers financial and longevity related risks from an individual investor to the insurance company underwriting the guarantee. We first analyze a continuous time version of this product in a Black Scholes economy with simplifying assumptions on population mortality and obtain an analytical solution for the product value. This analysis reveals the high sensitivity the product bears to several risk factors. We then price the GWB in a realistic setting using different asset pricing models, including those that allow the interest rates and the volatility of returns to be stochastic. Our analysis reveals that 1) GWB has insufficient price discrimination and is susceptible to adverse selection and 2) valuations can vary substantially depending on which class of models is used. We believe the ambiguity in value and the presence of significant risks, which can be challenging to hedge, should create concerns to the insurance companies offering the GWB, their investors and clients as well as the regulators.

show abstract

Embedded options and interest rate risk for insurance companies, banks and other financial institutions

Cited by 20 publications

References 14 publications

Real-Estate Risk Effects on Financial Institutions’ Stock Return Distribution: a Bivariate GARCH Analysis

Real-Estate Risk Effects on Financial Institutions’ Stock Return Distribution: a Bivariate GARCH Analysis

Assets and Liabilities Management Optimal Model Based on VaR Controlled Prepared Duration Gap

An Analysis of the Guaranteed Withdrawal Benefits for Life Option

Contact Info

Product

Resources

About