Valuation of variable annuities under stochastic volatility and stochastic jump intensity

Abstract

We present an efficient valuation approach for guaranteed minimum benefits embedded in variable annuity contracts, where the log price follows a jump-diffusion model with stochastic volatilities. In particular, we allow separate Cox-Ingersoll-Ross processes for the underlying volatility and the jump intensity, each correlated with the diffusion term of the spot price. To value the contract under such complex stochastic nature, we rely on the recent advances in the frame dual projection methods with the stochastic process approximated by its expectation. As a byproduct of the transparent analytical expression derived, we derive the associated Greeks that provide a practical basis for risk management. Numerical experiments demonstrate the accuracy and efficiency of the proposed method.