What the study found
The study found that guaranteed annuity option (GAO) prices are materially higher when interest-rate risk and mortality risk are modeled together with correlation and regime-switching. GAOs are contracts that let policyholders turn accumulated savings into a life annuity at a guaranteed minimum rate.
Why the authors say this matters
The authors say accurate valuation of these long-term, survival-contingent contracts is essential for solvency assessment and risk management. The findings indicate that the framework may be practically relevant for managing longevity-linked guarantees under economic and demographic uncertainty.
What the researchers tested
The researchers developed a pricing framework for GAOs that models interest rates and mortality rates as correlated stochastic processes with regime-switching governed by a finite-state continuous-time Markov chain. They estimated model parameters using U.S. interest rates and cohort mortality data with quasi-maximum likelihood estimation, and derived a semi-analytic valuation formula based on the joint distribution of the processes.
What worked and what didn't
Numerical results showed that including correlation and regime-switching increases GAO prices relative to conventional one-state models. The semi-analytic approach was reported to provide substantial computational advantages over standard Monte Carlo simulations. Sensitivity analysis identified parameters most relevant for long-horizon pricing and solvency considerations, but the abstract does not list those parameters.
What to keep in mind
The summary does not provide detailed numerical estimates, parameter values, or a full list of limitations. It also does not describe how the framework performs beyond the tested U.S. interest-rate and cohort-mortality data.
Key points
- GAOs are annuity contracts with a guaranteed minimum conversion rate at maturity.
- The study modeled interest rates and mortality rates as correlated processes with regime-switching.
- GAO prices were higher than in conventional one-state models when correlation and regime-switching were included.
- The semi-analytic method was said to be faster than standard Monte Carlo simulation.
- Sensitivity analysis highlighted parameters important for long-horizon pricing and solvency.
Disclosure
- Research title:
- Correlated regime-switching raises guaranteed annuity option prices
- Authors:
- Jude Martin B. Grozen, Rogemar Mamon
- Institutions:
- Asian Institute of Management, University of the Philippines Diliman, University of the Philippines Visayas, Western University
- Publication date:
- 2026-02-23
- OpenAlex record:
- View
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