Geometric stopping of a random walk and its applications to valuing equity-linked death benefits

Hans Gerber, Elias Siu, Hailiang Yang*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

17 Citations (Scopus)

Abstract

We study discrete-time models in which death benefits can depend on a stock price index, the logarithm of which is modeled as a random walk. Examples of such benefit payments include put and call options, barrier options, and lookback options. Because the distribution of the curtate-future-lifetime can be
approximated by a linear combination of geometric distributions, it suffices to consider curtate-futurelifetimes with a geometric distribution. In binomial and trinomial tree models, closed-form expressions for the expectations of the discounted benefit payment are obtained for a series of options. They are
based on results concerning geometric stopping of a random walk, in particular also on a version of the Wiener–Hopf factorization.
Original languageEnglish
Pages (from-to)313-325
Number of pages13
JournalInsurance: Mathematics and Economics
Volume64
DOIs
Publication statusPublished - 15 Sept 2015
Externally publishedYes

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