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The Effect of Modelling Parameters on the Value of GMWB Guarantees (2007)
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BibTeX
@MISC{Chen07theeffect,
author = {Z. Chen and K. Vetzal and P. A. Forsyth},
title = {The Effect of Modelling Parameters on the Value of GMWB Guarantees},
year = {2007}
}
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Abstract
In this article, an extensive study of the no-arbitrage fee for Guaranteed Minimum Withdrawal Benefit (GMWB) variable annuity riders is carried out. Taking into account such contractual features as the separation of mutual fund fees and the fees earmarked for hedging the guarantee, as well as the possibility of jumps in the value of the underlying asset, increases the value of the GMWB guarantee considerably. We also explore the effects of various modelling assumptions on the optimal withdrawal strategy of the contract holder, as well as the impact on the guarantee value of sub-optimal withdrawal behaviour. Our general conclusions are that only if several unrealistic modelling assumptions are made is it possible to obtain GMWB fees in the same range as is normally charged. In all other cases, it would appear that typical fees are not enough to cover the cost of hedging these guarantees.
Keyphrases
gmwb guarantee optimal withdrawal strategy extensive study account contractual feature sub-optimal withdrawal behaviour guaranteed minimum withdrawal benefit several unrealistic modelling assumption gmwb fee variable annuity rider guarantee value no-arbitrage fee contract holder underlying asset mutual fund fee typical fee general conclusion
