Hedging of variable annuities under basis risk


Bauer, Jan


Document Type: Conference presentation
Year of publication: 2019
Conference title: Asia-Pacific Risk and Insurance Association 23rd Annual Conference 2019
Location of the conference venue: Seoul, South Korea
Date of the conference: 28.-31.07.2019
Publication language: English
Institution: Außerfakultäre Einrichtungen > Institut für Versicherungswissenschaft
Business School > ABWL, Risikotheorie, Portfolio Management u. Versicherungswissenschaft (Albrecht)
Subject: 330 Economics
Classification: JEL: G13 , G22 , G32,
Keywords (English): Variable Annuities , Hedging , Basis Risk
Abstract: I study dynamic hedging for variable annuities under basis risk. Basis risk, which arises from the imperfect correlation between the underlying fund and the proxy asset used for hedging, has a highly negative impact on the hedging performance. I investigate whether the choice of a suitable hedging strategy can help to reduce the risk for the insurance company. Comparing several cross-hedging strategies that only trade in the proxy asset, I observe very similar hedging performances. Particularly, I find that well-established but complex strategies from mathematical finance do not outperform simple and naive approaches. Nonetheless, a naive delta-gamma hedge, which additionally uses plain vanilla options on the proxy asset, performs better than all tested one-instrument strategies. A more substantial risk reduction could, however, be achieved by diversification.




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Bauer, Jan Hedging of variable annuities under basis risk. (2019) Asia-Pacific Risk and Insurance Association 23rd Annual Conference 2019 (Seoul, South Korea) [Conference presentation]


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