Article Contents
Article Contents

# Pricing dynamic fund protection under a Regime-switching Jump-diffusion model with stochastic protection level

• * Corresponding author: Yinghui Dong

The authors thank the anonymous referees for valuable comments to improve the earlier version of the paper. This work is supported by the NSF of Jiangsu Province (Grant No. BK20170064), the NNSF of China (Grant No. 11771320), QingLan Project, the scholarship of Jiangsu Overseas Visiting Scholar Program, Suzhou Key Laboratory for Big Data and Information Service (SZS201813) and the Graduate Innovation Program (Grant No. KYCX17-2059) of Jiangsu Province of China

• In this paper, we investigate the valuation of dynamic fund protections under the assumption that the market value of the basic fund and the protection level follow regime-switching processes with jumps. The price of the dynamic fund protection (DFP) is associated with the Laplace transform of the first passage time. We derive the explicit formula for the Laplace transform of the DFP under the regime-switching, hyper-exponential jump-diffusion process. By using the Gaver-Stehfest algorithm, we present some numerical results for the price of the DFP.

Mathematics Subject Classification: Primary: 91B25, 91G20; Secondary: 62P20.

 Citation:

• Figure 1.  $DFP_0$ versus $T$

Figure 2.  $DFP_0$ versus $F_0$

Figure 3.  $DFP_0$ versus $K_0$

Figure 4.  $DFP_0$ versus $a_{12}$

Figure 5.  $DFP_0$ versus $\lambda_{11}$

Figure 6.  $DFP_0$ versus $\sigma_1$

Figure 7.  For example, if $k_{i1} = 1,i = 1,\cdots,m,$ $k_{i2} = 1,i = 0,1,\cdots,m-1, k_{m2} = 2,$ then we have $h(\tilde{\alpha}_{ij}-) = -\infty, h(\tilde{\alpha}_{ij}+) = +\infty.$ Therefore, there exists at least one root at each of the $2m$ intervals, $(0,\tilde{\alpha}_{11}),(\tilde{\alpha}_{11},\tilde{\alpha}_{12}),(\tilde{\alpha}_{12},\tilde{\alpha}_{21}),\cdots,(\tilde{\alpha}_{m1},\tilde{\alpha}_{m2})$ and there exists at least two roots at the interval $(\tilde{\alpha}_{m2},+\infty).$

•  [1] J. Buffington and R. J. Elliott, American options with regime switching, International Journal of Theoretical and Applied Finance, 5 (2002), 497-514.  doi: 10.1142/S0219024902001523. [2] C. C. Chang, Y. H. Lian and M. H. Tsay, Pricing dynamic guaranteed funds under a double exponential jump diffusion model, Academia Economic Papers, 40 (2012), 269-306. [3] Y. H. Dong, Pricing dynamic guaranteed funds with stochastic barrier under Vasicek interest rate model, hinese Journal of Applied Probability and Statistics, 29 (2013), 237-245. [4] Y. H. Dong, G. J. Wang and R. Wu, Pricing the zero-coupon bond and its fair premium under a structural credit risk model with jumps, Journal of Applied Probability, 48 (2011), 404-419.  doi: 10.1239/jap/1308662635. [5] R. J. Elliott, L. Aggoun and J. B. Moore, Hidden Markov Models: Estimation and Control, Springer-Verlag, Berlin-Heidelberg-New York, 1994. [6] R. J. Elliott, C. Leunglung and T. K. Siu, Option pricing and Esscher transform under regime switching, Annals of Finance, 1 (2005), 423-432.  doi: 10.1007/s10436-005-0013-z. [7] H. K. Fung and L. K. Li, Pricing discrete dynamic fund protections, North American Actuarial Journal, 7 (2003), 23-31.  doi: 10.1080/10920277.2003.10596115. [8] H. U. Gerber and G. Pafumi, Pricing dynamic investment fund protection, North American Actuarial Journal, 4 (2000), 28-37.  doi: 10.1080/10920277.2000.10595894. [9] H. U. Gerber and E. S. Shiu, From ruin theory to pricing reset guarantees and perpetual put options, Insurance: Mathematics and Economics, 24 (1999), 3-14.  doi: 10.1016/S0167-6687(98)00033-X. [10] H. U. Gerber and E. S. Shiu, Pricing perpetual fund protection with withdrawal option, North American Actuarial Journal, 7 (2003), 60-77.  doi: 10.1080/10920277.2003.10596087. [11] H. U. Gerber and E. S. W. Shiu, The time value of ruin in a Sparre Andersen model, North American Actuarial Journal, 9 (2005), 49-84.  doi: 10.1080/10920277.2005.10596197. [12] X. Guo, Information and option pricings, Quantitative Finance, 1 (2001), 38-44.  doi: 10.1080/713665550. [13] J. D. Hamilton, Rational-expectations econometric analysis of changes in regime: An investigation of the terms tructure of interest rates, Journal of Economic Dynamics and Control, 12 (1998), 385-423.  doi: 10.1016/0165-1889(88)90047-4. [14] M. R. Hardy, A regime-switching model of long-term stock returns, North American Actuarial Journal, 5 (2001), 41-53.  doi: 10.1080/10920277.2001.10595984. [15] J. Imai and P. P. Boyle, Dynamic fund protection, North American Actuarial Journal, 5 (2001), 31-47.  doi: 10.1080/10920277.2001.10595996. [16] Z. Jin, L. Y. Qian, W. Wang and R. M. Wang, Pricing dynamic fund protections with regime switching, Journal of Computational and Applied Mathematics, 297 (2016), 13-25.  doi: 10.1016/j.cam.2015.11.012. [17] S. G. Kou, A jump-diffusion model for option pricing, Management Science, 48 (2002), 1086-1101. [18] S. G. Kou and H. Wang, First passage times of a jump diffusion process, Advance in Applied Probability, 35 (2003), 504-531.  doi: 10.1239/aap/1051201658. [19] S. G. Kou and H. Wang, Option pricing under a double exponential jump diffusion model., Management Science, 50 (2004), 1178-1192. [20] V. Naik, Option valuation and hedging strategies with jumps in the volatility of asset returns, Journal of Finance, 48 (1993), 1969-1984.  doi: 10.1111/j.1540-6261.1993.tb05137.x. [21] C. C. Siu, S. C. P. Yam and H. Yang, Valuing equity-linked death benefits in a regime-switching framework, ASTIN Bulletin, 45 (2015), 355-395.  doi: 10.1017/asb.2014.32. [22] H. Y. Wong and C. M. Chan, Lookback options and dynamic fund protection under multiscale stochastic volatility, Insurance: Mathematics and Economics, 40 (2007), 357-385.  doi: 10.1016/j.insmatheco.2006.05.006. [23] H. Y. Wong and K. W. Lam, Valuation of discrete dynamic fund protection under Lévy processes, North American Actuarial Journal, 13 (2009), 202-216.  doi: 10.1080/10920277.2009.10597548. [24] C. Xu and Y. H. Dong, Pricing dynamic fund protections under a stochastic boundary, Journal of Suzhou University of Science and Technology, 2 (2018), 21-25.

Figures(7)