Calculating Variable Annuity Liability 'Greeks' Using Monte Carlo Simulation

Mark J. Cathcart, Steven Morrison and Alexander J. McNeil

Abstract: Hedging methods to mitigate the exposure of variable annuity products to market risks require the calculation of market risk sensitivities (or "Greeks"). The complex, path-dependent nature of these products means these sensitivities typically must be estimated by Monte Carlo simulation. Standard market practice is to measure such sensitivities using a "bump and revalue" method. As well as requiring multiple valuations, such approaches can be unreliable for higher order Greeks, e.g., gamma. In this article we investigate alternative estimators implemented within an advanced economic scenario generator model, incorporating stochastic interest-rates and stochastic equity volatility. The estimators can also be easily generalized to work with the addition of equity jumps in this model.

Date: 2011-10
New Economics Papers: this item is included in nep-cmp
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1110.4516

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