Boda Kang and Jonathan Ziveyi
In this paper we analyse how the policyholder surrender behaviour is influenced by changes in various sources of risk impacting a variable annuity (VA) contract embedded with a guaranteed minimum maturity benefit rider that can be surrendered anytime prior to maturity. We model the underlying mutual fund dynamics by combining a Heston (1993) stochastic volatility model together with a Hull and White (1990) stochastic interest rate process.
The model is able to capture the smile/skew often observed on equity option markets (Grzelak and Oosterlee, 2011) as well as the influence of the interest rates on the early surrender decisions as noted from our analysis.
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