Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/257964 
Authors: 
Year of Publication: 
2020
Citation: 
[Journal:] Risks [ISSN:] 2227-9091 [Volume:] 8 [Issue:] 1 [Article No.:] 9 [Publisher:] MDPI [Place:] Basel [Year:] 2020 [Pages:] 1-22
Publisher: 
MDPI, Basel
Abstract: 
This paper provides a discrete-time approach for evaluating financial and actuarial products characterized by path-dependent features in a regime-switching risk model. In each regime, a binomial discretization of the asset value is obtained by modifying the parameters used to generate the lattice in the highest-volatility regime, thus allowing a simultaneous asset description in all the regimes. The path-dependent feature is treated by computing representative values of the path-dependent function on a fixed number of effective trajectories reaching each lattice node. The prices of the analyzed products are calculated as the expected values of their payoffs registered over the lattice branches, invoking a quadratic interpolation technique if the regime changes, and capturing the switches among regimes by using a transition probability matrix. Some numerical applications are provided to support the model, which is also useful to accurately capture the market risk concerning path-dependent financial and actuarial instruments.
Subjects: 
binomial lattices
discrete-time models
insurance policies
market risk
path-dependent derivatives
regime-switching risk
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Creative Commons License: 
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Document Type: 
Article
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