3:00 pm Wednesday, March 21, 2018
Random Structures Seminar: Pricing and Hedging Insurance Risks Using Principle of Equivalent Forward Preferences by Wing Fung Chong (University of Illinois at Urbana-Champaign) in RLM 11.176
Since the work by Young and Zariphopoulou (2002), who introduced an indifference expected utility approach to price insurance risks, their actuarial pricing problem has been revisited in the literature, by extending the underlying financial market, considering different insurance products, and generalizing to a portfolio of policies. All of these works adopted the classical expected utility objective in order to apply the indifference pricing argument. Recently, a novel concept called forward investment performance process has been introduced by Musiela and Zariphopoulou (2008). Building upon this concept and the indifference argument, Zariphopoulou and Zitkovic (2010) defined forward entropic risk measures as a subclass of maturity independent risk measures. Inspired by these two works, in this talk, we revisit the pricing and hedging problem for insurance risks using indifferent forward performance preferences. Instead of adopting the classical dynamic programming principle, we approach the problem via the tools of backward stochastic differential equations (BSDEs). Using the technique of enlargement of filtration, and super-martingale sub-optimality and martingale optimality principles, we solve the problem by representing the price and the hedging strategy for insurance risks in terms of BSDEs. Submitted by
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