Valuing equity-linked guaranteed minimum death benefits with European-style Asian payoffs under a regime switching jump-diffusion model

Abstract

This paper presents a novel and efficient approach to pricing equity-linked guaranteed minimum death benefits (GMDB) with European-style geometric Asian and arithmetic Asian payoffs. Our method assumes that the underlying asset process follows a regime-switching Lévy model, which captures the key features of market dynamics in the continuous transition of the economy. To derive the approximate value of GMDB products, we employ the complex Fourier series (CFS) expansion method. Our error analysis demonstrates that this approach exhibits an exponential convergence rate. In our numerical experiments, we compare the CFS approach to other Fourier transform methods and Monte Carlo simulation. The results show that our method outperforms the other approaches in terms of both efficiency and accuracy. This paper contributes to the literature on pricing equity-linked GMDB products by proposing a novel and efficient approach based on regime-switching Lévy models and complex Fourier series expansion. The implications of our results may have significant practical implications for the insurance industry and financial markets.