Seminar by Thorsten Moenig

Actuarial Science and Financial Mathematics seminar series 

Thorsten Moenig
Temple University

Room: M3 3127

Basis risk in variable annuities

Several studies have argued that basis risk severely impedes the hedging of long-term financial guarantees in U.S. variable annuity (VA) products, putting carriers and policyholders at risk. In contrast, we construct a data analytic approach for VA portfolios that reduces basis risk to more acceptable levels by taking advantage of its diversification potential. Using historical fund returns for two VA carriers we demonstrate that our algorithm simultaneously achieves low residual basis risk and low transaction costs with few hedging instruments.