Gap risk in Constant Proportion Portfolio Insurance for life insurance

Specialeforsvar ved Hilmar Kass

Titel:  Gap risk in Constant Proportion Portfolio  Insurance for life insurance

Abstract: Gap risk in Constant Proportion Portfolio Insurance (CPPI) for life insurance is an issue. In this thesis, I show that gap risk is an issue in three cases: first, gap risk from price jumps in the stock market; second, gap risk from jumps in mortality; third, gap risk from limitation in trade and/or limitation in the observation of CPPI variables. A model exists to price the gap risk for the first case, while the latter two have not been studied. Here, I reformulate the mathematical setup of the two latter un-investigated cases into the framework of the first case. In this way, I can price all three forms of gap risks with the existing model of the first gap risk. I simulate gap risk to test the performance of the model to price the gap risk in all three cases. The results suggest that the reformulations are done correctly, with recommendations for further investigation of the gap risk variability in the third case.

Vejleder: Mogens Steffensen
Censor:    Kristian Buchardt, PFA