Reduced-form setting under model uncertainty with non-linear affine intensities
Abstract
In this talk we present a market model including financial assets and life insurance liabilities within a reduced-form framework under model uncertainty by following (1). In particular we extend this framework to include mortality intensities following an affine process under parameter uncertainty, as defined in (2). This allows both to introduce the definition of a longevity bond under model uncertainty in a consistent way with the classical case under one prior, as well as to compute it by explicit formulas or by numerical methods. We also study conditions to guarantee the existence of a càdlàg modification for the longevity bond’s value process. Furthermore, we show how the resulting market model extended with the longevity bond is arbitrage-free and study arbitrage-free pricing of contingent claims or life insurance liabilities in this setting. This talk is based on: (1) Francesca Biagini and Yinglin Zhang. Reduced-form framework under model uncertainty. The Annals of Applied Probability, 29(4):2481–2522, 2019. (2) Francesca Biagini and Katharina Oberpriller. Reduced-form setting under model uncertainty with non-linear affine intensities. Preprint University of Munich and Gran Sasso Science Institute, 2020. (3) Tolulope Fadina, Ariel Neufeld, and Thorsten Schmidt. Affine processes under parameter uncertainty. Probability, Uncertainty and Quantitative Risk volume 4 (5), 2019.
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