Pricing maturity guarantees in a regime-switching diffusion market

Document description

The author considers the pricing of maturity guarantees for insurance contracts in a regime-switching lognormal market model. Regime-switching models have been empirically shown to fit long-term stockmarket data better than many other models. As the market is incomplete, there is no unique price for a maturity guarantee. The author extends the good-deal pricing bounds idea to the regime-switching lognormal market model. This allows the author to obtain a reasonable range of prices for the maturity guarantee, by excluding those prices which imply a Sharpe Ratio which is too high. As an illustration, the paper calculates the good-deal pricing bounds for maturity guarantees of various maturities.