- Paper Title: Pricing of RCLA contract in incomplete market- PIDE approach
- Department Affiliation: Economics
- Supervisors’ Names: Professor Geoffrey Kingston
The purpose of this project is to implement the finite difference method into the pricing of the equity-linked insurance product in the incomplete market. Besides the Brownian motion, I included two extra risk terms, namely jumps and stochastic volatilities. Accordingly, the general two dimensional finite difference method for solving pricing PDE is extended to three-dimensions, and extra integral component is added to capture the possible jump in the process of risky asset.
It is the first study to use the three dimensional PIDE as the tool for pricing RCLA contract in the incomplete market.
Key literature/theoretical perspective:
Huang, Milevsky and Salisbury (2009), Heston (1993), Cont and Tankov (2004), Tankov and Voltchkova (2006).
By introducing the concept of RCLA contact, then I derive the risky asset process in the equivalent martingale measure, and further compute the corresponding PIDE in the Matlab.
By expanding the number of sources of risks in the asset process which will lead to more accuracy price of RCLA contract.
The limitation is that using PIDE may sometimes lead to convergence problem.
Practical and Social implications:
Providing the guidance to insurance companies or investment banks that are looking for the general pricing formula for the equity-linked securities.
RCLA, Equivalent Martingale Measure, Stochastic Volatility, Jump, PIDE