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Risk-minimizing portfolio selection for insurance payment processes under a Markov-modulated model

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  • This paper extends the model in Riesner (2007) to a Markov modulated Lévy process. The parameters of the Lévy process switch over time according to the different states of an economy, which is described by a finite-state continuous time Markov chain. Employing the local risk minimization method, we find an optimal hedging strategy for a general payment process. Finally, we give an example for single unit-linked insurance contracts with guarantee to display the specific locally risk-minimizing hedging strategy.
    Mathematics Subject Classification: Primary: 90C90; Secondary: 60J60.


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